1st February 2023

Rushed PPA inflates spending on coal as primary fuel

Sadrul Hasan, UNB

The government has sought a revision to the power purchase agreement (PPA) it signed with Adani Power Ltd for importing electricity from its thermal power plant in Jharkhand, India.


Bangladesh Power Development Board (BPDB), the government agency tasked with overseeing the development of the country’s power sector, has already sent a letter to the Indian company in this regard, according to officials familiar with the deal.


It seems the price of coal to be purchased as fuel for the project has emerged as the prime bone of contention.


“We have sent a letter to the Adani Group following a request we received in relation to opening LCs (in India) to import the coal that will be used as fuel for the 1,600 MW plant in Jharkhand,” a highly-placed official of BPDB told UNB, in return for anonymity to discuss the sensitive matter.


Since practically all the power generated by the plant located in the Godda district of Jharkhand state will be exported to Bangladesh, Adani Power requires a demand note from BPDB that it can present to Indian authorities before opening LCs against the coal import.


The cost incurred to import the coal, including transport from port to plant, will ultimately be borne by Bangladesh, with the price factored into the PPA's tariff structure.


Adani Power recently sent a request for BPDB to issue the demand note, where the coal price is quoted at $400 per metric ton (MT) - far above what BPDB officials believe it should be given the present state of the international market.


“In our view, the coal price they have quoted ($400/MT) is excessive - it should be less than $250/MT, which is what we are paying for the imported coal at our other thermal power plants," the official said.


The same sources also said Bangladesh’s stance on the issue was communicated to Adani Power officials during the visit of a delegation led by State Minister for Power, Energy and Mineral Resources Nasrul Hamid to the site of the power plant, that took place in the first week of January.


Publicly however, the state minister gave no indication of any such issue during the visit, instead telling reporters that Bangladesh would start importing the power generated by one of the two units at the plant, some 750 MW, from March.


The subsequent letter counts as BPDB’s formal request for the PPA to be reviewed and tariff structure to be adjusted before it can start importing the electricity, officials said.


No Discounts, Please?

A number of BPDB officials told UNB it was the absence of a provision for discounts on the purchase of coal in the PPA signed with Adani Power, that allowed the Indian firm to quote such a steep bill for the coal.


The absence of such a provision is all the more notable since it was made mandatory in the PPAs for thermal power plants signed with other independent power producers, domestic or foreign. In these PPAs, the price of coal to be purchased as primary fuel was kept as “pass-through”.


The PPA with Adani Power was signed in November 2017, in Dhaka. Then-Power Division Joint Secretary Faizul Amin, BPDB secretary at the time Mina Masuduzzaman and Adani’s Business Development President Kandarp Patel signed two documents - the PPA and an Implementing Agreement - on behalf of their respective sides.


Interestingly, reports in Bangladeshi media from the time suggest the agreement had to be rushed through in the end, on the insistence of the Indian company. A date proposed by the Power Division had to be brought forward, reported Energy and Power magazine, as the Indian company ‘was insisting to sign the deal earlier’.


Most of the top and senior officials of the Power Division were unable to attend, the report adds. Did this rush to sign ‘ahead of schedule’ in the end cause the absence of the discount provision to be missed?


Incidentally the coal for the project, it is now known, will be purchased from the Adani-owned Carmichael mine in Queensland, Australia.


Normally, the price of coal is calculated on the basis of the Newcastle Price Index, with purchases of high quantities or with higher calorific values enabling the buyer to avail discounts of upto 55 percent on the bulk value.


For example, the provision is present in the PPA for the 1320 MW Payra power plant, a Bangladesh-China joint venture where BPDB is benefiting from discounts on coal purchases. The amount of coal required to operate these plants typically runs into the millions of tonnes.


The annual requirement of coal for the Godda plant is estimated to be 7-9 million tonnes. But given the omission of a discount provision, Bangladesh will ultimately end up paying Adani Power Tk 20-22 per unit of electricity, once all the hidden costs are piled on top of the tariff.


"Compare that to the price it pays for the electricity bought from coal-fired plants in Bangladesh, which is below Tk 12 per unit," the senior BPDB official said.


He and others insist that if Adani doesn’t agree to adjust the pricing mechanism for coal in the PPA, it would be simply unviable for Bangladesh to import power from the Godda power plant.


As per Power Division documents seen by UNB, Bangladesh would be paying Adani Power an estimated $23.87 billion, equivalent to almost Tk 240,000 crore (considering US dollar exchange rate at Tk 100), over the 25-year life cycle of the plant, if the PPA remains unchanged.


Adani Power’s investment in the plant, including transmission lines till the Bangladesh border, have been estimated at around $2.1 billion.

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