Rs 7,410-crore question: Jharkhand amended energy policy to buy power from Adani at higher price

Located on the easternmost tip of Jharkhand near the border of West Bengal, Godda is a district of rolling grasslands and thick forests, punctuated with palm trees and paddy fields, underneath which runs a rich coal seam. The district is home to one of India’s oldest coal mines. But it has one of the lowest electrification rates in the country.

Adani Power Limited, which is part of the Adani Group, is constructing a 1,600 megawatts coal-fired thermal power project here. But the electricity won’t be for local use: it will be supplied across the border to Bangladesh.

Under state policy, Jharkhand is legally entitled to buying 25% of the electricity generated by thermal power projects built within the state. Adani Power Limited has said it will meet this requirement, but from another source, which it has not specified.

The power won’t come cheap. Government documents accessed by Scroll.in show that Jharkhand has amended its energy policy in 2016 to allow the company to charge a higher price than what other thermal projects bill the state.

Older agreements signed with existing thermal power projects allow Jharkhand to buy 12% of the electricity at a price that covers only variable costs – mostly the cost of fuel. The remaining 13% comes at a price that covers both fixed and variable costs – the cost of fuel plus the cost of building and running the project – with the actual tariff determined by the state electricity regulatory commission.

The first stage agreement signed with Adani Power Limited in February 2016 was on similar lines – it said Jharkhand could buy 25% of the electricity based on existing regulations. But the company asked for a change in the terms in the second stage agreement. It wanted the availability of 12% electricity at purely variable costs to be made conditional on the state providing concessional coal for the project. In other words, Jharkhand would have to pay both fixed and variable costs for the entire 25% of the electricity, or supply concessional coal for the Adani project.

Until 2014, many state governments in India, including Jharkhand, enabled thermal power projects within their states to get cheap coal by recommending them to the Centre for the allotment of a captive coal mine – a mine that they could use strictly for their project. But in August 2014, the Supreme Court cancelled such discretionary allotments of coal mines, describing them as arbitrary and non-transparent. In 2015, the Centre amended the law to make auctions mandatory for coal mine allocations.

In its correspondence with Jharkhand government in 2016, Adani Power Limited cited this change in India’s coal mining law as the reason for seeking amendments in the agreement for the Godda project.

Jharkhand’s Bharatiya Janata Party government amended the state’s energy policy on October 6, 2016, in keeping with the changes proposed by the company. The changes were also reflected in the second stage agreement that was prepared the next day itself, and formally signed by both the parties on October 21.

A confidential government audit report, of which Scroll.in has a copy, calculates that the revised terms could cost the state an additional Rs 296.40 crore every year. Over the course of 25 years – the duration of Adani’s power purchase agreement with Bangladesh – Jharkhand could end up paying the company an additional Rs 7,410 crore.

The office of the state accountant general, which reports to the Comptroller and Auditor General of India, raised queries about the agreement with Jharkhand’s energy department on May 12, 2017. It said the agreement with Adani amounted to “preferential treatment” and would result in “undue benefits” to the company. It pointed out that older thermal power projects were selling electricity to Jharkhand at a lower price based on the earlier formula. The amended energy policy did not retrospectively apply to them, even though they had been stripped of their captive coal mines following the Supreme Court’s 2014 judgement.

“It is desirable that there should be consistency and uniformity in the clauses of MoUs between the parties identically situated,” the audit report said.

Jharkhand energy department’s response to the audit enquiry is not in the public domain. Neither the energy department nor the Chief Minister’s Office responded to questions emailed by Scroll.in. This story will be updated if they respond.

Adani Power Limited did not answer specific questions emailed by Scroll.in. A company spokesperson said since the Godda project “will not have connectivity with Indian Grid, the 25% power to Jharkhand Govt. will be supplied from alternate source but at the tariff of Godda Project; and the said tariff will be determined by State Regulatory Commission.”

“The Godda Power Project is conceived based on imported coal,” the spokesperson added.

At the time of signing agreements with Bangladesh, the Adani Group had not disclosed the coal source for the Godda plant. To India’s environment ministry, Adani Power Limited furnished an agreement in April 2017 with a coal trading firm in Indonesia, PT Limas Tunggal, for the supply of nine million tonnes of coal, while also citing mines in Australia, Indonesia and South Africa as possible sources. In March 2018, the chief executive of Adani Enterprises in Australia, Jeyakumar Janakaraj, announced that coal from its Carmichael mine in Queensland state, which is still facing roadblocks, would be used to produce electricity in the Godda project for Bangladesh.

Coal shipped from Australia would raise the costs of producing electricity in Godda, said a report published in April 2018 by the Institute for Energy Economics and Financial Analysis, an international non-profit research organisation.

“The idea of importing coal at great expense into India’s biggest coal mining state makes no strategic sense,” said Simon Nicholas, an energy finance analyst at IEEFA.

The agreement with Bangladesh

The Godda power project took shape in June 2015, when Prime Minister Narendra Modi travelled to Dhaka to meet his Bangladeshi counterpart Sheikh Hasina and made a pitch for Indian power companies.

Bangladesh is power-starved. With barely any hydro-power potential or fossil-fuel deposits, the country needs to import electricity from its neighbours, or seek technical and financial support to build power-generating projects of its own.

In 2010, India extended a billion-dollar line of credit to Bangladesh to set up infrastructure projects. The same year, India’s National Thermal Power Corporation and Bangladesh Power Development Board signed an MoU to build two coal-fired power plants of 1,320 megawatts each in Bangladesh.

For the next four years, India’s contribution to Bangladesh’s grid was state-driven. But the dynamic changed in 2014, when India elected the Modi-led National Democratic Alliance to power.

On June 6, 2015, on his first visit to Dhaka, Prime Minister Modi said India could be a major partner in helping Bangladesh achieve its goals of having 24,000 MW of power by 2021. He sought Prime Minister Hasina’s help for “facilitating the entry of Indian companies in the power generation, transmission and distribution sector of Bangladesh.”

The same day, Bangladesh Power Development Board announced separate agreement to buy electricity from thermal power projects to be built by Adani Power Limited and Reliance Power Limited.

The Memorandum of Understanding was signed by Adani and Bangladesh two months later, on August 11, 2015, while the implementation agreement was inked two years later, during Hasina’s visit to New Delhi on Modi’s invitation in April 2017. The tariff was left to be determined during the negotiation of the power purchase agreement, which was signed in early November at an event that most of the Bangladesh Power Division’s officials were unable to attend, according to this report in The Daily Sun.

Power-purchase agreements essentially spell out how much power will be supplied and at what rate. They should ideally have short lock-in periods, to account for the fluctuation in energy markets, with firms picked through competitive auctions to keep power prices low, rule out corruption and encourage competition, experts say. Adani’s agreement with Bangladesh has a 25-year lock-in period.

Estimates on the price under the power purchase agreement signed with Bangladesh vary. “The Bangladesh Power Development Board has stated that the agreed tariff is 8.6127 US cents per unit, equal to Rs 5.82 per unit although no details over what is and isn’t included in this cost have been made available,” said Simon Nichols of IEEFA.

In recent months, Bangladesh has chosen to use the competitive bidding route to purchase power from Indian power companies. In February 2018, the National Thermal Power Corporation won a bid to supply Bangladesh 300 MW of power at Rs. 3.42 per kilowatt hour, much lower than Adani.

The cost of power

Despite hosting the largest reserves of coal in India, Jharkhand is power-starved. Only 59% of its households have electricity connections, against the national average of 82%. The average per capita consumption of electricity in the state is 552 units, nearly half the national average.

The state’s energy policy, formulated in 2012, offered several incentives to thermal power companies to set up projects in Jharkhand, on the condition that they offer up to 25% of the electricity generated to the state, which has the first right to buy or refuse this power.

There are chiefly two kinds of costs that power producers bill to governments: fixed costs and variable costs. Fixed costs typically cover land and capital infrastructure. Variable costs include fuel, labour and maintenance expenses.

IEEFA’s report pointed out the Godda project has already seen significant delays, which could lead to a rise in fixed costs.

The variable costs of coal plants are extremely price-sensitive, since fossil-fuel prices are constantly fluctuating. If coal prices spike – such as in the case of imported coal from Australia or Indonesia – this would mean high fixed and high variable costs, making power prohibitively expensive for governments to buy.

A tale of two MoUs

On February 17, 2016, during the government’s Make In India week in Mumbai, Adani Power Limited signed the first stage Memorandum of Understanding with Jharkhand government for the Godda power project. It states that power from the project would be wholly supplied to Bangladesh, while the company would give Jharkhand its 25% share from “other sources”, with the price determined as per existing policies.

This is a departure from the normal practice of power companies supplying the host state’s share of electricity from the project itself.

Energy researchers say this could have serious power-pricing implications. “For instance, if Adani were to supply power from an old plant, such as the Korba (West) plant in Chhattisgarh it is in the process of acquiring, it would have markedly lower fixed costs than what setting up a new plant like Godda would cost, and a much lower cost of coal,” said Tim Buckley of IEEFA. “Billing the cost of power from such a plant as equivalent to Godda would again result in a huge benefit for Adani, and possibly subsidise another loss-making power plant.”

Soon after the first stage MoU was signed, on April 21, 2016, Adani Power Limited wrote a letter to Jharkhand’s energy department, expressing its reservations over the terms of the second stage MoU, and seeking a meeting to discuss possible amendments. A month later, the Business Standard and the Telegraph reported that SKG Rahate, then the state’s energy secretary, went on long leave after flagging concerns over the changes Adani was suggesting to the MoU. Rahate, who is now the home secretary of Jharkhand, declined comment when contacted by Scroll.in.

On July 13, Adani wrote to the energy department again, seeking discussions “so that MoU draft can be amended appropriately”, because “it is noticed that it is not aligned with the current rules and regulations of Government”.

On August 10, Adani sent a third letter to the department – this time spelling out a specific set of amendments, with a column citing their rationale.

The key amendment it asked for:

 “Out of said 25%, under first right of refusal to the State, the rate of 13% share will be as approved by JSERC [Jharkhand State Electricity Regulatory Commission], and 12% variable cost will also be approved by JSERC, subject to allocation of suitable coal source by Govt. of Jharkhand at concessional price…”  

The rationale Adani cited for this:

“With the enactment of the coal mines (special provision act 2015), allocation of coal blocks under the Government Dispensation route, based on the recommendations of State Government is not possible. In order to provide a level playing field, GOJ should provide suitable coal source at concessional price for meeting the entire requirement of the project.”  

In August 2014, the Supreme Court had cancelled discretionary allotments of coal mines, describing them as arbitrary and non-transparent. In 2015, the Centre amended the law to make auctions mandatory for coal mine allocations.

In the absence of coal mine allocation, thermal power companies turned to imported coal or sought coal linkages or contracts with the government-run Coal India Limited. In 2016, the government made electronic auctions mandatory for coal linkages.

In the first round of auctions of coal mines auctions held in March 2015, Adani Group won the bid for Jitpur coal mine. This mine is located in Godda district, but the company won the bid strictly for the supply of coal to its thermal power project in Mundra, Gujarat.

Months later, when it signed agreements with Bangladesh for the Godda power project, the company did not disclose the source of coal. In correspondence with Jharkhand government, however, the company asked for the supply of domestic concessional coal for its project, despite the fact that the electricity generated would not be used domestically but would be exported to another country.

A week after it sent a letter to Jharkhand energy department asking for amendments to the second stage MoU, on August 17, 2016, Adani Power Limited wrote to the government-run Jharkhand State Mineral Development Corporation, asking it to obtain a coal linkage for the Godda project. In its reply on August 2, the corporation turned down the request, stating that this could only be obtained from Coal India Limited through electronic auctions.

On October 6, 2016, the Jharkhand’s energy department issued a resolution amending the state energy policy, with the consent of the council of ministers secured in September. Even before the resolution could be notified in the state gazette, the next day itself, Adani Power and the state government prepared an amended draft of the second stage MoU.

Section 10.2 of this MoU cited the freshly inserted clause in the energy policy, word-for-word.

The amendments in Jharkhand’s energy policy and the terms under the second stage MoU have resulted in this: the state government will now have to buy electricity from the Adani project at fixed and variable costs, instead of 13% at fixed and variable costs, and 12% at purely variable costs. Essentially, this means that the state will pay nearly double the fixed cost compared to earlier, unless it allocates Adani a coal linkage, which it cannot legally.

According to calculations made by auditors in the office of the state accountant general, under the earlier arrangement, Jharkhand would be buying power at Rs 72.4 crores a month, but now it would have to pay Adani Power Limited Rs 97.1 crores a month. This comes to an extra Rs 24.7 crores every month, which translates into Rs 296.40 crores every year and Rs 7,410 crores for the 25 years of the power purchase agreement that Adani has signed with the Bangladesh government.

For the calculations, the auditors used estimates based on fuel and fixed costs in existing MoUs signed by Jharkhand with two private companies – Adhunik Power and Natural Resources Limited and Inland Power Limited. Together, these two projects supply nearly a third of Jharkhand’s electricity.

After the Supreme Court’s 2015 judgement, both the projects were stripped of their coal blocks and landed in an advanced stage of debt. Both have switched to buying coal from Coal India Limited in e-auctions through the government’s SHAKTI scheme, launched in 2017.

Neither of the two companies – or any other thermal company supplying power to Jharkhand – has benefited from the state’s amended energy policy, since it solely applies only to MoUs signed after the amendment was made, not those signed earlier.

Jharkhand continues to buy power from the older projects on the basis of the earlier formula – 12% power at variable costs and 13% at fixed and variable costs – even though they no longer have access to concessional coal.

As of March 2018, Inland Power was still complying with the earlier tariff structure as stated in its MoU and receiving its coal supply via e-auctions. However, in February 2018, Adhunik Power cited the cancellation of its coal block as reason to relinquish its long-term bulk-power transmission agreement for the supply of 250 MW of power.

Larger questions

Jharkhand’s amendment of its energy policy raises a larger question: with thermal power projects no longer getting concessional coal, should they be freed of the obligation of providing electricity to state governments at lower rates?

Ashok Khurana, the director general of the Association of Power Producers, an organisation representing private power companies in India, certainly thinks so. He described Jharkhand’s decision to amend its policy as “correct”.

“No concession is being given [to thermal power projects] by the state government other than helping out,” he said.

But energy researchers point out coal is not the only concession that thermal power projects get from host states, and the absence of it should not be a reason to revise electricity prices upwards. In fact, Jharkhand’s changed policy sets a bad precedent, they argue.

“Power plants are already getting large numbers of concessions from governments, from land being made available and acquired on their behalf, and huge quantities of water allocated to them,” said Shripad Dharmadhikary, an energy researcher at the non-profit organisation Manthan.

Adani’s Godda project has been given permission to annually draw 36 million cubic metres of water from river Chir. This, after it had failed to submit details on the river’s flow pattern and catchment areas for four times in a row before the Environment Ministry’s expert panel.

“This project got stalled at the environment ministry specifically because of its enormous water consumption,” said Dharmadhikary.

Jharkhand government is also acquiring land for the project as well as the private rail line the company is building for the transport of coal.

The land acquisition is contentious under both state and central laws, and the company is facing stiff resistance from local residents, as the next story in this series reports.