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Raising the ‘Bar’ for India’s Power Sector

Aditi Roy Ghatak ( is an independent journalist based in Kolkata. She runs her own consulting firm ARG Syndication. Abir Dasgupta ( is with the EPW.

Two prominent infrastructure companies belonging to Adani Group and Tata Group had sought the assistance of electricity regulators to hike the rate at which they sold power to several state power utility and distribution companies. They claimed that compensatory tariffs to the tune of nearly ₹8,000 crore were due to them as they had to absorb an increase in the price of coal imported from Indonesia used to fuel their power plants. But this was denied to them by the Supreme Court.

The authors wish to thank Paranjoy Guha Thakurta, editor of the EPW for his editorial inputs and Advait Rao Palepu for his research assistance.

This article follows the revelations made in this journal (“How Over-invoicing of Imported Coal Has Increased Power Tariffs: A ₹29,000 Crore Scam,” EPW, 9 April 2016, and “Power Tariff Scam Gets Bigger at ₹50,000 Crore: Did Adani and Essar Group Over-Invoice Power Plant Equipment?,” EPW, 21 May 2016) of how the Adani Group and others sought to exploit regulations by inflating power tariffs through the over-invoicing of imported coal and the over-invoicing of imported power generation equipment. The total size of scam is currently estimated to be around ₹50,000 crore, if not more.

India’s high-flying industrialists are not used to having their pockets picked. Yet India’s apex court appears to have done just that, in the most honourable manner, one might add. Justices Pinaki Chandra Ghose and Rohinton Nariman of the Supreme Court, in a recent order, have produced a sterling judgment with far reaching consequences for two major private corporate players in India’s power sector—companies in the Adani Group and Tata Group—as well as for the future governance of the power sector. The judgment of the Supreme Court is expected to set a precedent for a number of similar cases currently being dealt with by various state-level electricity regulators across the country. As the Court order affects the operations of two of India’s three largest coal-fired thermal power plants, this moment offers an opportunity to re-evaluate the country’s long-term strategy to build large electricity generating capacities in an efficient, sustainable and inexpensive manner. It also offers an opportunity to take a relook at the various regulatory conundrums that the sector currently faces.

The 11 April Supreme Court order,1 which relates to a clutch of cases involving power generating subsidiaries of the Adani and Tata Groups, along with a number of other players in the power sector, has relieved two particular companies—Adani Power Limited and a subsidiary of Tata Power Limited, Coastal Gujarat Power Limited (CGPL)—of an estimated ₹4,300 crore and ₹3,600 crore respectively (Financial Express 2017) that they had nearly managed to secure as compensation for what they claimed was an unexpected rise in the price of coal imported from Indonesia. Tata Power (through CGPL) owns and operates a 4,000 megawatt (MW) “ultra mega power project” (UMPP) in the town of Mundra, Gujarat while Adani Power operates the 4,620 MW Mundra Power Plant, both located near the Mundra port in Gujarat. Both thermal power plants use Indonesian coal and both sell their power to several state power utility and distribution companies (discoms) in Maharashtra, Gujarat, Rajasthan, Punjab and Haryana. Both companies had argued that an increased cost in procuring high-quality coal from Indonesia merited an increase in the price charged by them; implying that the burden of this increased tariff would have fallen on the discoms, and finally, on the consumers.

The apex court’s order was in response to a set of appeals that had been filed in the Supreme Court by the state discoms and the civil society non-governmental organisations (NGOs) Energy Watchdog and Prayas (Energy Group)—both authorised consumer representatives for the power sector who have been involved in these cases from their origin at various state regulators—against an April 2016 order2 of the Appellate Tribunal for Electricity (APTEL) based on which in December 2016 the Central Electricity Regulatory Commission (CERC) had awarded compensatory tariffs to the power producers.

The APTEL order had remanded the CERC to recalculate compensation due to the power producers, having changed the legal basis on which the compensation was permissible. Earlier, in 2014, the CERC had awarded3 compensatory tariffs to Adani Power and CGPL based on calculations done by a committee headed by Deepak Parekh, the chairman of HDFC (formerly the Housing Development Finance Corporation). (Disclosure: Parekh is a trustee of the Sameeksha Trust which publishes the EPW.) The compensatory tariffs awarded then had amounted to ₹0.52 per unit for CGPL and ₹0.41 per unit for Adani Power. This award was to apply for five years till 2019.4 The award was challenged before APTEL by the discoms and the NGOs. APTEL then ruled that while some compensation was due to Adani Power and CGPL, the legal basis on which the CERC had awarded this was invalid. Having established a different justification, APTEL ordered the CERC to recalculate the award. The December 2016 recalculation by the CERC—based on sample calculations offered by CGPL and Adani Power in their respective cases5 and also taking into account caveats and objections raised by the discoms and the civil society representatives—had been “much more generous” to the power companies (Financial Express 2017). The order by the Supreme Court, by setting aside the APTEL ruling, has effectively also set aside the CERC award.

The Supreme Court’s order implies a huge earnings setback for CGPL and Adani Power, with the latter having already included a likely inflow of compensatory tariff to the tune of ₹8,800 crore (Vishwanath 2017) in its revenue calculations and projections (having assumed that the CERC award would hold). For the Tata Group company, the court order increases the risk of a future earnings downgrade for 2018. The annual negative impact on Tata Power could be ₹800–₹1,000 crore, if the company continues running their power producing units at the minimum plant load factor, that is, at the minimum level needed for the plant to stay operational (Vishwanath 2017).

The fact that the Supreme Court set aside the CERC award also increases the probability of both power plants at Mundra becoming economically unviable. CGPL in its submissions to CERC and APTEL had said that if a compensatory tariff were not awarded the project would lose ₹1,873 crore a year, totalling ₹47,500 crore over its entire 25-year period of expected operation. After the court order, Tata Power stated, “CGPL would continue to work towards alternatives, including sourcing of competitive and alternative coals to best contain the onslaught of under recovery.” Analysts, however, expect that CGPL may now decide to forego their equity investment of ₹4,000 crore and may ask lenders to either restructure the company’s debt or sign new contracts to sell power to state discoms or find a new developer for the project (Vishwanath 2017).At the time of publication it was reported that CGPL has discontinued operating 800 MW of the 4,000 MW total capacity of its plant (Economic Times 2017).

More than CGPL, for Adani Power, which has been infusing nearly ₹2,000 crore into its power project every year and which had a consolidated debt of ₹49,547 crore at the end of September 2016, the Supreme Court order is a bigger shock (Vishwanath 2017). The company has a high net debt-to-equity ratio of 6:1 and the ₹8,800 crore of expected earnings in compensatory tariffs that it had booked in its accounts but which it will now not get, is higher than its estimated net worth of ₹7,948 crore (Vishwanath 2017).In a statement to the Bombay Stock Exchange, Adani Power said,

a preliminary analysis [of the court order] showed that [the company] will get benefit in respect of its [contract] for 1,424 MW to Haryana discoms, the [contract] for 3,300 MW with Maharashtra discoms and in [the contract] for 1,200 MW with Rajasthan discoms. (Vishwanath 2017)

The Supreme Court has stated that compensatory tariffs can be granted differently (due to changes in the country’s coal allocation policy in 2013). Still, analysts suggest that the amounts that can be expected as benefits will be significantly lower than what was earlier awarded by APTEL and CERC. Meanwhile, the Economic Times reported on 11 May that Adani Power has already started to scale down its operations at its Mundra plant and cut power supplies to the Gujarat state discom by deactivating capacity of 1,250 MW (out of its total capacity of 4,620 MW) (Economic Times 2017).

As two members of Prayas point out in an article for the Wire,since the CERC’s award of compensatory tariffs to Adani and Tata, regulatory commissions in several states such as Maharashta,6 Uttar Pradesh,7 and Rajasthan8 started revising competitively-discovered tariffs under Section 63 of the Electricity Act, 2003, by granting additional compensatory tariffs for similar claims (Chitnis and Dixit 2017). “Thus, even in the absence of any possibility of relief under the contract, the commissions were using their regulatory powers to grant compensatory tariff without any public consultation,” the Prayas members stated. Media reports suggest that the total compensatory tariff granted by various commissions aggregates ₹11,000 crore. It can be expected that the Supreme Court order will set a precedent for each of these awards as well, in case these are challenged.

Tariff Determination Process

Thermal power tariffs have two components: fixed costs and variable costs. Fixed costs include interest on loans, returns on equity, depreciation, operation and maintenance expenses, insurance, taxes and interest on working capital. Variable costs comprise fuel cost (coal and oil) in the case of coal-based thermal plants. The two-part tariff structure allows power producers to recover fixed costs such as capital investment even when the entire capacity is not utilised.

The Electricity Act allows for tariffs to be determined in two ways. Under Section 62 of the act it allows tariffs to be determined by the appropriate (state or central) regulatory commission for the “supply of electricity by a generating company to a distribution licensee.” In the event of a shortage of fuel supply, the regulator may fix the upper and lower limits of the tariff in terms of the agreement signed between a generating company and the licensees for no more than a year to ensure that the price paid by the consumer of electricity is reasonable.

The second approach to determining tariffs defined under Section 63 of the act is discovering it through a competitive bidding process. Under this system, power producers are invited to submit their bids to supply power to state discoms whenever the need for fresh capacity arises or a new power project is to be set up. Section 63 allows regulatory commissions to “adopt” such competitively discovered tariffs, under procedures notified by the central government.The regulatory commissions are meant to monitor the bidding process and as per guidelines notified in 2005, the central government notifies the standard bidding documents such as the request for qualification (RfQ), request for proposal (RfP) and the power purchase agreements (PPAs) that are to be signed between the power producers and the discoms. These documents were last notified in 2014 and were meant to be valid for five years.

The bidding guidelines constitute a fair and transparent process and give the bidders an option to pass through fuel price and other related risks by quoting various escalable and non-escalable charges. Escalable parameters allow bidders to transparently pass on potential price variations for each of their subcomponents. The escalable components play a crucial role in deciding the competitiveness of a given bid and hence, the ultimate tariff. The bids are evaluated based on the “levelised tariff” and the PPA is signed with the lowest bidder. The levelised tariff is the ratio of the net present value of total capital and operating costs of a plant to the net present value of the net cost of electricity generated by that plant over its operating life. The discount rate used for calculating the net present value is a crucial variable and is notified by the CERC every six months, for evaluating bids opened in that period.

The distribution company is required to publish all financial bids without the names of the bidder along with the winning bid on its website after the PPA has been signed. Besides, a notice with details of the signed PPA must be published in at least two national dailies and published on the company website. The final signed PPA along with the necessary certificates and reports are to be submitted to the regulatory commission for tariff adoption. The quoted tariff cannot be changed post-bidding (unless specifically allowed in the terms of the PPA). Under the standard model PPA, competitively determined tariffs can only be changed under the terms of Article 12 (“change in law”) or Article 13 (“force majeure”—or unforeseen circumstances outside the control of the contracting parties).

Increasingly, it is the process under Section 63 that has become important for most new power projects in the country. Large contracts for setting up new power plants using non-renewable fuel sources are up for grabs in India with the Twelfth Five Year Plan (2012–17) noting that capacity addition from conventional sources is estimated at 1,01,645 MW. Of the total capacity addition, 56% is expected to come from the private sector, according to the Central Electricity Authority (CEA 2016).Private corporate groups like the Adani Group and the Tata Group obviously want a big share of this cake and have been bidding successfully in many cases, though not necessarily wisely.

It goes without saying that any overvaluation of plant equipment or fuel leads to an increase in the base capital cost of the project. In the case of a project for which tariffs are determined under Section 62, such an overvaluation can have serious tariff implications because the fixed cost component is approved by the regulatory commission. When the overvaluation becomes part of the base cost, it is annually recoverable and will directly burden electricity consumers in terms of excess tariff. In competitively bid projects, bidders are expected to put their best foot forward, offering the most reasonable rates possible. However, as has been reported earlier in this journal, the Adani Group, among others, allegedly overvalued both equipment and coal imported from Indonesia which is currently being investigated by the Directorate of Revenue Intelligence in the Ministry of Finance (Guha Thakurta 2016; Guha Thakurta and Malik 2016).

The Adani Power Case

Adani Power’s Mundra project in Gujarat has PPAs with state-owned discoms in Rajasthan, Gujarat, Haryana and Punjab (Vishwanath 2017).The project had initially not planned on using Indonesian coal. It assumed that coal would come from indigenous sources and from Germany and Japan. Indonesian coal entered the picture later. The Supreme Court judgment laid out the background of how Adani Power came to win these contracts:

On 1 February 2006, Gujarat Urja Vikas Nigam Limited (GUVNL) issued a public notice inviting proposals for supply of power on long term basis under three different competitive bid processes. The participating bidders were to decide on the tariff and quote such tariff after competing against each other. The bidders were entitled to quote escalable or non-escalable tariff or partly escalable and partly non-escalable tariff, as was considered appropriate by them to cover their respective risks so as to obtain whatever returns are available to them. The best levelised tariff as per certain pre-disclosed criteria was to be followed in order to arrive at the lowest tender.

In January 2007, a consortium led by Adani Power submitted its bid for generation and supply of 1,000 MW to GUVNL, quoting a levelised tariff of ₹2.3495/kWh (kilowatt hour) with ₹1/kWh as the capacity charge, and ₹1.3495/kWh as the non-escalable energy charge. The consortium won the GUVNL contract on 11 January 2007 with a letter of intent (LoI) issued in its favour. This was followed by a PPA between GUVNL and Adani Power signed on 2 February 2007 for the supply of power from a project being set up at Korba in Chhattisgarh. The agreed terms were changed on 18 April 2007 when the power source was changed to the Mundra project. This did not seem to be of any great consequence at that time and a supplementary PPA was signed to this effect on the same date.

During this period, Adani Power also bid successfully to supply power to the Haryana state discom. The Haryana discom initiated its competitive bidding process for the supply of 2,000 MW of power on a long-term basis on 25 May 2006, on similar lines to the GUVNL public notice. Adani Power’s successful bid entailed the company supplying 1,424 MW power to the Haryana discom at a levelised tariff of ₹2.94/kWh from the Mundra plant non-escalable energy charges. Adani Power won the bid on 17 July 2008, received a LoI and executed two PPAs with two Haryana government entities for the supply of 712 MW of power to each entity from the MPP. The Haryana State Electricity Regulatory Commission adopted the tariff under Section 63 of the Electricity Act on 31 July 2008 while the Gujarat regulatory authority adopted the tariff for the supply of power to GUVNL on 20 December 2007.

At the time of these bids, the consortium had indicated that the Adani Group—through its flagship company Adani Enterprises Limited (AEL)—had an arrangement with the Gujarat Mineral Development Corporation for indigenous coal procurement for the project, because it had been allotted a certain coal block in Chhattisgarh. There was no talk of Indonesian coal at this stage. AEL said that it had signed a memorandum of understanding (MoU) with a German company named Coal Orbis Trading GMBH for the supply of 3–5 million tonnes of imported coal on a long-term basis till the year 2032. There was a similar MoU between AEL and a Japanese agent (Kowa Company Limited) for supply of 3–5 million tonnes of coal on a long term basis. The two MoUs were attached to the bid proposal submitted to GUVNL. They also formed the basis of coal supply agreements (CSAs) that AEL signed with Adani Power on 8 December 2006 to supply coal for phases I and II of the Mundra power project.

However, after signing the first PPA for the Gujarat utility, AEL terminated its MoUs with the German and Japanese suppliers. Subsequently, AEL executed another two CSAs with Adani Power on 24 March 2008 (for phase III of the project) and on 15 April 2008 (for phase IV). It was at this stage that Indonesian coal entered the picture. AEL had floated a Singapore-based subsidiary, PT Adani Global Limited, in 2000 which had acquired mining rights for the Bunyu mines in Indonesia in 2008. According to a red herring prospectus (Adani Power Limited 2009) issued by Adani Power on 14 July 2009 (seeking to raise ₹3,000 crore through an initial public offering), the company stated that

[t]he primary fuel for the [Mundra] power project will be coal, which we propose to source from AEL … [t]he expected consumption of coal for the Mundra Phase I and II Power Project is 3.68 MMTPA (million metric tonnes per annum) with an average GCV (gross calorific value, a measure of the quality of coal) of 6,000 kcal/kg at 85.0% PLF (plant load factor). PT Adani Global, a wholly owned subsidiary of AEL, has entered into agreements to exclusively mine coal in Bunyu island, Indonesia. For [the MPP], AEL proposes to procure the coal from these mines in Indonesia.

On 14 December 2009, a CSA was executed between PT Adani Global and Indonesian mining company PT Dua Samudera Perkasa for the supply of 10 MMTPA of coal at the CIF (cost, insurance and freight) price of $30–$35 per metric tonne depending upon its GCV. On 26 July 2010, AEL entered into a consolidated CSA with Adani Power. The consolidated CSA provided for the supply of 10 MMTPA of coal at CIF price of $36 per tonne for 15 years from the scheduled commercial operation date of the last unit of phase IV of the project. This agreement replaced all previous CSAs between the companies and effectively, the entire quantum of coal required for the company’s Mundra project was now to be sourced from Indonesia.

What is significant to note is that almost a year before the December 2009 agreement, on 12 January 2009, the Indonesian government passed the Law on Mineral and Coal Mining No 4 of 2009 (hereafter, the “mining law”) designed to overhaul the mining industry to enhance its value for the Indonesian economy. This law replaced the previous Mining Law No 11/1967 which had governed all of Indonesia’s pre-2009 mining concessions and applied to all existing arrangements. The new mining law eliminated several of those concessions, making it mandatory for Indonesian coal miners and suppliers to benchmark the price at which they sold their coal to the prevailing rates in the international market. While its implementation took another year, it was clear from January 2009 to all stakeholders that a rise in the price of Indonesian coal was imminent. On 23 September 2010, Indonesia’s minister of energy and mineral resources promulgated the Regulation of Ministry of Energy and Mineral Resources No 17 of 2010; Article 2 required the holders of mining permits (and their affiliates) to sell the output at prices determined by the benchmark price either for domestic sales or exports. Existing CSAs were required to be updated to reflect the new regime within a year’s time. It was at this time that the actual escalation in the price of Indonesian coal took place.

This prompted Adani Power to petition the CERC seeking relief

on the score of the impact of the Indonesian Regulation to either discharge them from the performance of the PPA on account of frustration, or to evolve a mechanism to restore the petitioners to the same economic condition prior to occurrence of the change in law.

Adani Power argued that there were three possible routes by which they could receive relief: on account of the “change in law” clause in the PPAs—wherein it claimed that the clause must be read as including foreign laws as well—or via the “force majeure” clause of the PPAs. The company contended that the new law of the Indonesian government constituted a force majeure event (force majeure implies the action of forces outside the control of the parties to a contract and unforeseeable for them, which prevents or unavoidably delays the discharge of their duties under the contract). Failing both, it sought relief under Section 79 of the Electricity Act. Adani Power claimed that the CERC, in accordance with its functions as a regulator protecting the interests of both consumers and producers, could summarily revise the tariff laid out in the PPAs in order to compensate the company.

The Tata Power Case

In the case of the Tata Power-owned CGPL, the story began in 2005 when the Ministry of Power in association with the CEA and the Power Finance Corporation initiated the concept of UMPPs with the aim of meeting India’s growing power demand. The idea was to commission several high capacity thermal power plants, each in the range of 4,000 MW. The private sector was expected to take over the construction, commissioning and operation of the power plants following a process of competitive bidding (Power Finance Corporation of India nd).Special purpose vehicles (SPVs) were to be set up by the central government and state governments as shell companies for the purpose of acquiring land, providing water supply and fuel supply for those UMPPs which were to be attached to captive mines. The necessary regulatory clearances were required to be obtained before the projects were offered to private players to take over. The SPV mechanism was developed in order to “enhance the investor’s confidence, reduce risk perception, and get a good response to the competitive bidding process” (Power Finance Corporation of India nd).

It was expected that this method would result in the discovery of competitive power tariffs. Of the 19 SPVs formed under this programme, only four have reached the stage of competitive bidding. Two UMPPs are currently operational—CGPL in Mundra and Reliance Power’s Sasan UMPP in Madhya Pradesh (Ministry of Power nd).The establishment of two others, at Tilaiya in Jharkhand and at Krishnapatnam in Andhra Pradesh—both also owned by Reliance Power—have been delayed due to a variety of factors. Reliance Power backed out of the Tilaiya UMPP in April 2015 citing delays in land acquisition. Subsequently the SPV was taken over by a group of power procurers (Jai 2016).Reliance Power has requested the Andhra Pradesh government for a similar move for the Krishnapatnam UMPP which has apparently been stalled due to the company not being able to supply electricity due to higher prices of Indonesian coal (Business Standard 2016).

CGPL’s Mundra UMPP was set up to supply power to discoms in Gujarat, Maharashtra, Rajasthan, Punjab and Haryana. In accordance with the guidelines issued by the power ministry, CGPL was incorporated on 10 February 2006 to undertake the process of bidding on behalf of the procurers as an SPV wholly owned by the Power Finance Corporation. The RfQ was notified on 31 March 2006, and on 7 November, 11 qualifying bidders, including Tata Power were issued with RfP documents. As per the RfP, the tariff to be quoted would consist of two main components: the energy charge and the capacity charge, with both split further into escalable and non-escalable components. After evaluating the bids that were submitted, Tata Power’s was declared to be the winning bid, quoting a levelised tariff of ₹2.26367 per kWh. An LoI was issued to it on 28 December 2006 and Tata Power acquired 100% ownership of CGPL on 22 April 2007. CGPL entered into PPAs with the respective state discoms on 22 April for the supply of 3,800 MW of power. The CERC adopted the tariffs and notified them in an order dated 19 September 2007.

CGPL envisaged that it would run its plant using imported coal. It required a supply of approximately 12 MMTPA of coal. CGPL entered a CSA with Indonesia’s IndoCoal Resources (Cayman) Limited for the supply of 5.85 MMTPA on 31 October 2008. Tata Power was to supply the remaining requirement to CGPL, and the two companies signed a CSA on 9 September 2008. Tata Power reassigned its existing agreement with IndoCoal Resources for supply of 3.51 MMTPA of coal (which earlier powered its coastal Maharashtra power plant) via an Assignment and Restatement Agreement dated 28 March 2011. Here too, it is necessary to note that this reassignment was taking place after the Indonesian price hike. While the CSA that it re-routed from the coastal Maharashtra plant to the Mundra UMPP was signed before the price hike, it is unclear why the issue of the escalated price had no effect on the reassignment agreement.

When the Indonesian mining law was passed in 2009 and consequent regulations notified in 2010, CGPL calculated that the change in coal price without an adjustment of the tariff would result in a loss of ₹1,873 crore per annum, adding up to ₹47,500 crore over the 25-year contract period (according to submissions it made to the CERC). It took up the issue with the lead procurer GUVNL and the Ministry of Power through a letter dated 4 August 2011. The ministry responded stating that

[a] PPA is a legally binding document exclusively between the procurers and the developer. Therefore, any issue arising therein is to be settled within the provisions of PPA by the contracting parties for which Gujarat being the Lead Procurer may take necessary action.

Following an unsuccessful attempt by CGPL to obtain an exemption from the Indonesian government for it to come under the purview of the new mining law, on 9 March 2012, it was called upon by IndoCoal to align the original CSAs with the new regulations. With the CSAs amended on 23 March and 22 June, CGPL filed for relief at the CERC requesting compensatory tariffs along the same three possible routes as Adani Power did.

Trials and Tribulations

The issues then took an interesting turn at the CERC. On 2 April 20139 (in the Adani case) and 15 April 201310 (in the CGPL case), the commission passed similar orders on both cases. It held the claims by Adani Power and CGPL requesting relief to be permissible. It, however, rejected the claims of force majeure and/or change in law. Consequently, seeking to provide them relief by some other route, the CERC exercised its regulatory powers under Section 79 of the act to “provide redressal of grievances to generating companies, considering the larger public interest and hence constituted [the Deepak Parekh] committee to look into the alleged difficulties faced by Adani and to find an acceptable solution thereto” in the words of the Supreme Court judgment. The committee submitted its report on the basis of which the CERC awarded compensatory tariffs to CGPL11 and Adani Power12 in 2014.

Expectedly, a flurry of appeals and cross-appeals resulted, including appeals before the APTEL and even the Supreme Court. The upshot was a combined order13 on both the cases by APTEL on 7 April 2016. The APTEL order held that the CERC’s exercise of its regulatory power under Section 79 of the act to award compensatory tariff was unwarranted since the PPAs had been the result of a competitive process of tariff discovery under Section 63. The APTEL order reviewed the questions of force majeure and change in law, and found that while the change in law provisions did not apply—because the relevant change in law was not a change in Indian law—a case of force majeure was made out. Having reached this conclusion, APTEL remanded the matter back to CERC to determine the impact of the force majeure event, in order to grant compensatory tariffs. On 6 December 2016, the CERC arrived at a certain determination,14 and granted compensatory tariffs on account of force majeure. At this stage, appeals against the APTEL order were pending at the Supreme Court and the CERC in its ruling noted that its award was subject to the outcome of the case in the apex court.

In the Supreme Court, the appellants represented by senior counsel Raju Ramachandran and Prashant Bhushan argued that force majeure, as defined in Section 56 of the Indian Contracts Act, 1872, read with the specific contractual definition in the relevant clauses of the respective PPAs could not apply, making it clear that “it must be an unforeseen event or circumstance that wholly or partly prevents the affected party in the performance of its obligations under the agreement.” Their main contentions were that Adani Power and CGPL had voluntarily decided to quote energy charges as non-escalable in order to make their bids competitive and, therefore, to win the contracts. The bids were not premised on the import of coal from Indonesia only and it was open to them to get coal from any source. They argued that

[t]he price of coal is the price of raw material and if prices go up, a contract does not get frustrated merely because it becomes commercially onerous, as the PPA itself states in clause 12.4. In any event, the fundamental basis of the PPAs between the parties was not premised on the price of coal imported from Indonesia.

A battery of legal luminaries argued the case. Harish Salve and Abhishek Manu Singhvi appeared for Adani Power while Kapil Sibal and C S Vaidyanathan appeared for the Tata Group. They argued that the fundamental basis of the PPAs was the CSA that was entered into and pointed out various clauses in the PPAs to substantiate their claim that the CSA and imported coal were both very important elements in the bids and the PPAs. According to them,

[n]on-escalable tariffs do not lead to the conclusion that if a source of coal becomes unavailable in a manner that completely undermines the basis of the bid, the tariff cannot be adjusted. If otherwise they fall within the change in law provision and/or force majeure provision, the mere fact that a non-escalable tariff has been quoted would make no difference.

They found support in the fact that neither GUVNL nor the Haryana discoms had filed appeals and emphasised that it was clear that “where there is grave unforeseen hardship on account of non-allocation of Indian coal, the rise in cost should be adequately compensated.” They argued further that, in any event, the CERC did not give them the entire benefit of the rise in the prices of coal. Thus, they contended that in the final analysis, the relief granted on the ground of force majeure by the CERC should not be disturbed and relief on the ground of change in law should, in addition, have been given to them.

Another interesting intervention in the matter was the appearance of the Attorney General of India Mukul Rohatgi who appeared on behalf of the Union of India to state how important private producers of power were, in the Indian scheme of things. To quote the judges

[Rohatgi] was only appearing in order to apprise us that the electricity sector, having been privatised, has largely fulfilled the object sought to be achieved by the 2003 Act, which is that electricity generation, being de-licensed, should result in production of far greater electricity than was earlier produced. He urged us not to disturb the delicate balance sought to [be] achieved by the Act, [that is] that producers or generators of electricity, in order that they set up power plants, be entitled to a reasonable margin of profit and a reasonable return on their capital, so that they are induced to set up more and more power plants.

Rohatgi strongly relied upon Section 3 of the Electricity Act which states that the central government shall from time to time, prepare a National Electricity Policy and a tariff policy in consultation with state governments, and the requisite authority for development of the entire power system, based on the optimal utilisation of natural resources, which will be binding on all concerned; something also indicated in Section 79(4). The attorney general also referred to a decision of the Cabinet Committee for Economic Affairs which recognised the overall shortfall in the supply of domestic coal and the subsequent new coal distribution policy of July 2013 which was formulated. The new policy, he said, had binding directions

making it clear that as generators of electricity, who depend upon indigenous coal, have been given less coal than was anticipated, should be allowed either to import the coal themselves, or purchase imported coal from Coal India Limited with the difference in price being passed through to them.

He further referred to and relied upon the revised tariff policy of 28 January 2016 to bolster his arguments in favour of grating compensatory tariffs.

What was evident during the proceedings in the Supreme Court was that the Indian government represented by Rohatgi and the lawyers representing Adani Power and CGPL were all singing the same tune!

Supreme Court Slams the Door Shut

Having heard all the submissions, Justices Ghosh and Nariman delivered their verdict. On the question of force majeure, they explained that the claim by the power producers of “frustration” did not hold as the fundamental basis of the PPAs remained unaltered.

Nowhere do the PPAs state that coal is to be procured only from Indonesia at a particular price. In fact, it is clear on a reading of the PPA as a whole that the price payable for the supply of coal is entirely for the person who sets up the power plant to bear. The fact that the fuel supply agreement has to be appended to the PPA is only to indicate that the raw material for the working of the plant is there and is in order. It is clear that an unexpected rise in the price of coal will not absolve the generating companies from performing their part of the contract for the very good reason that when they submitted their bids, this was a risk they knowingly took ... (that) the bid may be non-escalable does not mean that the respondents are precluded from raising the plea of frustration, if otherwise, it is available in law and can be pleaded by them. But the fact that a non-escalable tariff has been paid for, for example, in the Adani case, is a factor which may be taken into account only to show that the risk of supplying electricity at the tariff indicated was upon the generating company.

Accordingly, the Supreme Court rejected the claim of force majeure.

On the exercise of regulatory power under Section 79 by the CERC, the Supreme Court upheld the appellants’ contention that

[u]nder Section 63 of the Act, the Commission does not “determine” but only “adopts” tariffs discovered through a transparent process of competitive bidding.” Thus, “there is no residuary source of power contained in the Commission either in Section 79 or otherwise to fix compensatory tariffs once the tariff is adopted under Section 63. If at all, such tariff can be modified only in accordance with the guidelines issued by the Central Government and not otherwise ... “[i]t is clear that in a situation where the guidelines issued by the Central Government under Section 63 cover the situation, the Central Commission is bound by those guidelines and must exercise its regulatory functions, albeit under Section 79(1)(b), only in accordance with those guidelines … it is only in a situation where there are no guidelines framed at all or where the guidelines do not deal with a given situation that the Commission’s general regulatory powers under Section 79(1)(b) can then be used.

In this instance, given that the PPAs and the bidding guidelines clearly spell out the conditions under which tariffs can be revised, the Supreme Court held that the CERC could not overrule those provisions under its regulatory powers.

On the question of change in law, the Court clarified that the term “law” could not be construed to mean any law whether Indian or foreign.

The meaning will have to remain the same whether coal is sourced wholly in India, partly in India and partly from outside, or wholly from outside. This being the case, the meaning of the expression “any law” in clause 13 cannot possibly be interpreted in the manner suggested by the respondents.


With these arguments therefore, all three routes to compensation were shut off.

The Supreme Court did provide an alternate route to some relief though, albeit at a significantly smaller scale. In October 2007, the New Coal Distribution Policy had been notified by the central government, spelling out a framework for future coal allocations from Indian coal mines. This policy was amended in July 2013, with India staring at shortages in domestic coal supply. The 2013 amendment made it clear that only a certain percentage of domestic coal could be allocated via Fuel Supply Agreements (FSAs) and that any surplus requirement of a project would have to be covered through imported coal or spot auctions. The amendment stated that

[t]aking into account the overall domestic availability and the likely actual requirements of these TPPs [thermal power plants], it has been decided that FSAs will be signed for the domestic coal quantity of 65%, 65%, 67% and 75% of ACQ [Annual Contracted Quantity] for the remaining four years of the 12th Plan for the power plants having normal coal linkages.

The apex court granted that this amendment constituted a “change in law” event and to this limited extent offered relief for the period after July 2013. The order directed that the CERC should calculate on a case-by-case basis what the quantum of relief would be under these considerations. Preliminary calculations by analysts at Prayas suggest that the total relief using this route is much lower. They wrote

as far as domestic coal is concerned, the last year has witnessed an impressive increase in production from CIL [Coal India Limited] and SCCL [Singareni Collieries Company Limited] of about 43 MT and in fact CIL has been advised to reduce production to avoid excessive stockpiling. The benchmark price for Indonesian coal peaked around March 2012, but … it has been falling since then. So it seems that the worst of the Indonesian coal price increase was already past by July 2013. Given the fall in power sector’s demand for coal and increase in CIL’s production, one can also assume that the worst of domestic coal shortage is past. Thus, the impact is likely to be only for the period of one or two years from August 2013. Considering all these factors, our preliminary macro analysis shows that the total relief as awarded by the Supreme Court would only be around 20-25% of the relief granted by various regulatory commissions. (Chitnis and Dixit 2017)

The sequence of events prior to the initial claim at the CERC though begs the question as to how force majeure was considered to be a valid argument at all when in fact the new Indonesian law—the factor that had actually resulted in the price rise—had already been promulgated when Adani Power signed its final consolidated CSA in 2010. As we have seen, a similar issue can be pointed out in the CGPL claim of force majeure as well. Curiously, the fact that the mining law preceded the final CSAs was not belaboured even by those arguing against the compensatory tariff hike. The focus of the case, instead, was on the fact that the Indonesian regulations followed the signing of the earlier CSAs, which provided the power producers the ability to claim that a hike in coal prices had made their bid untenable. In any event, the Supreme Court brought all this chicanery to nought but the episode demonstrates the mindset of some of India’s top infrastructure companies and corporate conglomerates.


Following this order by the apex court, both projects at Mundra—originally intended to supply electricity for a 25-year period—now seem unviable. As mentioned above, both CGPL and Adani Power have already started to cut electricity supply from these power plants. Will the projects shut down?

The Supreme Court order has thrown into uncertainty the future of India’s coal-based thermal power generation sector. Will no new large coal-fired power projects be sanctioned in the near future? Only two of the 19 proposed UMPPs are currently operational, as already stated. The remaining projects that were envisaged have found no takers in the private sector. The Gujarat government recently announced that it was dropping its proposal for setting up a second UMPP in the state and had no intentions of reviving the proposal (Jai and Dave 2017). There is a pervasive regulatory ambiguity in this sector. No clarifications have come from government officials on how best to deal with changes in law and regulations in foreign countries where Indian corporations operate or have interests that are directly tied to the financial and operational viability of domestic power projects. There is still little clarity on who should bear the higher costs if compensation is due. The Supreme Court verdict merely patches an individual problem that requires more systemic policy action to deal with. Gajendra Haldea, a former member of the (erstwhile) Planning Commission and the author both of the Electricity Act, 2003, and the model PPAs that the sector currently uses, argues that

it is patently unsustainable to pass on the inflation risk or commodity price risk to an individual company on a long-term basis ... [and a contract which demands this] reflects poorly on all the contracting parties. (Haldea 2017)

Two other points are also pertinent to consider. The first is that the general issue of compensatory tariffs is not necessarily restricted to coal and conventional ways of generating electricity. Both the Draft National Electricity Plan of December 2016 and the Twelfth Five Year Plan envision India becoming energy secure through renewable energy sources rather than coal or other conventional fuels. This is in line with commitments made by India to the international community to reduce India’s carbon dependence at the Paris Climate Change Conference in 2015. With the solar energy sector booming worldwide and India lacking significant domestic capability to build capacity, equipment will continue to have to be imported. Prices will rise and fall depending on market forces and India requires a clear plan on how to deal with all eventualities. Regulators and the government cannot allow ambiguity to prevail and unconsciously encourage litigation. Government authorities at various levels cannot absolve themselves of the responsibility to mediate and regulate rather than rely on the judiciary.

The other point is the question of how seriously India takes deregulation of the electricity sector that was envisaged in 2003 when the Electricity Act was passed. At that time, the aim was to “unbundle the various segments of the electricity industry with a view to enabling competition and choice in the supply of electricity to consumers” (Haldea 2017). While the aim has been achieved to some extent in the case of power generation with several private players having demonstrated capability and competence, power distribution remains a government monopoly. As a result, with all suppliers having to sell their power to the government bodies which control distribution of electricity to consumers, the consequent lack of competition benefits entrenched interests.

Distribution companies have also piled up a huge ₹4,00,000 crore in debt that is now being passed on to taxpayers through the Narendra Modi launched UDAY (Ujwal Discom Assurance Yojana) scheme, in a repeat of the grim scenario that the country had faced in 2002. A decade and a half later “the soul of the Electricity Act [has] remain[ed] caged” (Haldea 2017). In the few limited cases where competition has been permitted in power distribution, such as in the city of Mumbai, it is becoming apparent that regulatory problems persist resulting in an inability to achieve the goal of making power more abundant and cheaper to consume. A detailed analysis by Prayas of the situation in Mumbai has shown how the use of the cost-plus regulatory regime has in fact proved counter-productive, providing little incentive for the private players to optimise operations (Prayas [Energy Group] 2017).

The Supreme Court order, aside from dealing with the specific issues in the Adani Power and Tata Power cases, has sent out a strong and unambiguous signal. It makes it clear that bidders must bid with honesty of intent and that they must do so in a bidding environment that is fair and which ensures sanctity of contracts. More importantly, the order makes it clear that it is always the consumer whose interests and rights must come first. The order may mark a watershed moment for India’s electricity sector.


1 Prayas (Energy Group) and ors v Coastal Gujarat Power Limited, Adani Power Limited and ors (2017) in the Supreme Court of India, =44760.

2 Prayas (Energy Group) and ors v Adani Power Limited, Coastal Gujarat Power Limited and ors (2016) in the Appellate Tribunal for Electricity at New Delhi,

3 Petition No 155/MP/2012 (2014) in the Central Electricity Regulatory Commission at New Delhi, and Petition No 159/MP/2012 (2014) in the Central Electricity Regulatory Commission at New Delhi,

4 Central Electricity Regulatory Commission Notification No.L-1/144/2013/CERC (2013),

5 Petition No 155/MP/2012 (2014) in the Central Electricity Regulatary Commision at New Delhi for Adani Power. Petition No 159/MP/2012 (2014) in the Central Electricity Regulatory Commission at New Delhi for CGPL.

6 Case No 63 of 2014 in the Maharashtra State Electricity Regulatory Commission at Mumbai (2014),

7 Petition No 871 and 891 of 2013 in the Uttar Pradesh Electricity Regulatory Commission at Lucknow (2015),

8 Petition No RERC-577/15 in the Rajasthan Electricity Regulatory Commission (2015),

9 Petition No 155/MP/2012 (2013) in the Central Electricity Regulatory Commission at New Delhi,

10 Petition No 159/MP/2012 (2013) in the Central Electricity Regulatory Commission at New Delhi,

11 Petition No 159/MP/2012 (2014) in the Central Electricity Regulatory Commission at New Delhi,

12 Petition No 155/MP/2012 (2014) in the Central Electricity Regulatory Commission at New Delhi,

13 Prayas (Energy Group) and ors v Adani Power Limited, Coastal Gujarat Power Limited and ors (2016) in the Appellate Tribunal for Electricity at New Delhi,

14 Petition No 155/MP/2012 (2016) in the Central Electricity Regulatory Commission at New Delhi, 155MP2012.pdf and Petition No 159/MP/2012 (2016) in the Central Electricity Regulatory Commission at New Delhi,


Adani Power Limited (2009): “Red Herring Prospectus,” 14 July,

Business Standard (2016): “Reliance Power Seeks to Exit Krishnapatnam UMPP, Writes to Andhra Govt,” 26 January,

CEA (2016): “Draft National Electricity Plan (Volume 1): Generation,” December, Central Electricity Authority,

Chitnis, Ashwini and Shantanu Dixit (2017): “Supreme Court’s Order on ‘Compensatory Tariff’ Powers Accountability and Strengthens Competition,” the Wire, 20 April,

Economic Times (2017): “Adani Power Cuts 1,250 MW Power Supply to GUVNL,” 11 May,

Financial Express (2017): “Tata Power, Adani Power Hit by Supreme Court Order on Compensatory Tariffs; Losses Logged at Rs 4,300 cr, Rs 3,600 cr Respectively,” 12 April,

Guha Thakurta, Paranjoy and Malik, Aman (2016): “How Over-invoicing of Imported Coal Has Increased Power Tariffs,” Economic & Political Weekly, 51(15), 15/commentary/how-over-invoicing-imported-coal-has-increased-power-tariffs.html.

Guha Thakurta, Paranjoy (2016): “Power Tariff Scam Gets Bigger at ₹50,000 Crore,” Economic & Political Weekly, Vol 51, No 21,

Haldea, Gajendra (2017): “Yet Another Commandment,” Business Standard, 18 April,

Jai, Shreya (2016): “Jharkhand to Take Over Tilaiya UMPP, Buy All Shares from R-Power,” Business Standard, 6 January,

Jai, Shreya and Vimukt Dave (2017): “Gujarat Drops 4,000-Mw Coal Power Project,” Business Standard, 8 May,

Ministry of Power (nd): “Ultra Mega Power Projects,”

Power Finance Corporation of India (nd): “Ultra Mega Power Projects (UMPP)”

Prayas (Energy Group) (2017): “In the Name of Competition: The Annals of ‘Cost-plus Competition’ in the Electricity Sector in Mumbai.”

Vishwanath, Apurva (2017): “Blow to Tata Power, Adani as Supreme Court Sets Aside Ruling on Tariff,” Livemint, 12 April,

Updated On : 25th May, 2017


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