Extended Annual Review Report

Project Number: 41946-014

Loan Number: 2419
November 2020

Coastal Gujarat Power Limited

Mundra Ultra Mega Power Project
(India)

This is an abbreviated version of the document, which excludes information that is subject to
exceptions to disclosure set forth in ADB’s Access to Information Policy.
 CURRENCY EQUIVALENTS
Currency unit – Indian rupee/s (₹)

At Appraisal At Operations Evaluation

(25 January 2008) (9 June 2020)
₹1.00 – $0.025 $0.013
$1.00 – ₹39.47 ₹75.47

ABBREVIATIONS

ADB – Asian Development Bank

CDM – Clean Development Mechanism
CERC – Central Electricity Regulatory Commission
CGPL – Coastal Gujarat Power Ltd
COD – commercial operation date
COVID-19 – coronavirus disease
CRP – compliance review panel
CSO – chief sustainability officer
CSR – corporate social responsibility
dBA – A-weighted decibels, unit of loudness of sound
EBITDA – earnings before interest, tax, depreciation, and amortization
EHS – environment, health and safety
EIRR – economic internal rate of return
EMP – environmental management plan
ETP – effluent treatment plant
FIRR – financial internal rate of return
GRM – grievance redress mechanism
IFC – International Finance Corporation
ISO – International Organization for Standardization
KEXIM – Export–Import Bank of Korea
km – kilometer
KPC – PT Kaltim Prima Coal, Indonesia based coal miner and exporter
kWh – kilowatt-hour or a unit of electricity
LIP – livelihood improvement plan
MoEFCC – Ministry of Environment, Forest and Climate Change,
Government of India
MT – metric ton
MW – megawatt
NAAQS – National Ambient Air Quality Standards, India
NGO – non-governmental organization
NIO – National Institute of Oceanography
OM – operations manual
PLF – plant load factor
PM10 – particulate matter with a diameter of 10 micrometers
PM2.5 – particulate matter with a diameter of 2.5 micrometers
PPA – power purchase agreement
 PPAH – World Bank Group’s Pollution Prevention and Abatement
Handbook
PPP – public–private partnership
RAP – remedial action plan
RRP – report and recommendation of the President
SBI – State Bank of India
SEIA – summary of environmental impact assessment
tCO2 – ton of CO2
TPC – Tata Power Company Limited
UMPP – ultra mega power project
WBG – World Bank Group
XARR – extended annual review report
µg/m3 – micro gram per meter cube

NOTES

(i) The fiscal year (FY) of Coastal Gujarat Power Limited ends on 31 March, as per
calendar year.
(ii) In this report, "$" refers to US dollars.

Vice-President Ashok Lavasa, Private Sector Operations and Public–Private

Partnerships
Director General Michael Barrow, Private Sector Operations Department (PSOD)
Director Marife Apilado, Portfolio Management Division, PSPM, PSOD

Team leader Samarendra Singh, Principal Investment Specialist, PSPM, PSOD

Team members Susanna Irwan, Consultant, PSPM, PSOD
Manfred Kiefer, Senior Economist, Private Sector Transaction Support
Division (PSTS), PSOD
Melissa Moyano Manguiat, Senior Safeguards Officer, PSTS, PSOD
Jocelyn Erlinda S. Munsayac, Principal Safeguards Specialist, PSTS,
PSOD
Avesh Prakash Patil, Senior Investment Specialist, PSPM, PSOD
Noel Peters, Principal Safeguards Specialist, PSTS, PSOD
Arlene Porras, Senior Safeguards Officer, PSTS, PSOD
Viswanathan Ramasubramanian, Senior Safeguards Specialist, Urban
and Social Sectors Division, East Asia Department
Shivendra Sharma, Consultant, PSPM, PSOD

In preparing any country program or strategy, financing any project, or by making any designation
of or reference to a particular territory or geographic area in this document, the Asian
Development Bank does not intend to make any judgements as to the legal or other status of any
territory or area.
 CONTENTS

Page

BASIC DATA i
EXECUTIVE SUMMARY ii
I. THE PROJECT 1
A. Project Background 1
B. Key Project Features 1
C. Progress Highlights 2
II. EVALUATION 4
A. Project Rationale and Objectives 4
B. Development Impact 4
C. ADB Additionality 7
E. ADB’s Work Quality 7
III. ISSUES, LESSONS, AND RECOMMENDED FOLLOW-UP ACTIONS 7
A. Issues and Lessons 7
B. Recommendations and Follow-Up Actions 8

APPENDIXES
1. Project-Related Data 9
2. Results and Ratings for Project Contributions to Private Sector Development and ADB
Strategic Development Objectives—Infrastructure 10
3. Sector Review 13
4. Summary of Proceedings in Tariff Dispute 15
5. Project Outputs and Outcomes vs RRP Targets 17
 i

BASIC DATA
Mundra Ultra Mega Power Project
(Loan number 2419–India)
Key Project Data As per ADB Project Actual
Documents
($ million) ($ million)
Total Project Cost 4,226.7 4,620.1
ADB Loan 450.0 450.0
Direct Exposure
Committed 250.0 250.0
Disbursed 250.0 192.0
Outstanding Nil Nil
KEXIM Risk Participation
Committed 200.0 200.0
Disbursed 159.2 159.2
Outstanding Nil Nil
ADB = Asian Development Bank, KEXIM = Export–Import Bank of Korea.
Note: Actual figure is based on the exchange rate of ₹39.47 per $1 prevalent at appraisal in the report and
recommendation of the President, and outstanding figure is based on 31 March 2020 data.

Key Dates Expecteda Actual

Concept Clearance Approval 31 August 2007 31 August 2007
Fact-Finding Missions 12 March 2008 12 March 2008
Board Approval 17 April 2008 17 April 2008
Execution of Agreements including Risk-sharing 24 April 2008 24 April 2008
First Disbursement 5 December 2008 5 December 2008
a Expected dates have been assumed to be the same as actual dates since the concept clearance paper for the
project was approved at in August 2007 and Board approval was obtained by March 2008.

Project Administration and Monitoring Number of Missions Number of Person-Days

Due Diligence and Appraisal 3 20
Negotiations and Signing 3 22
XARR Mission 0 0
Note: Signing missions are as per ADB records. Missions and person days for due diligence and appraisal have
been estimated at similar levels basis negotiation and signing missions. No missions fielded for XARR because of
the COVID-19 pandemic and the loan being fully prepaid before commencement of the XARR.
 EXECUTIVE SUMMARY

In April 2008, the Board of Directors of the Asian Development Bank (ADB) approved a loan of
up to $450 million with a 20-year tenor to Coastal Gujarat Power Limited (a 100% subsidiary of
Tata Power Company Limited (TPC). ADB funded $250 million of the total and syndicated $200
million to the Export–Import Bank of Korea through a risk participation agreement. The project
involved construction, operation and maintenance of a 4,000 megawatt (MW) coal power plant
using supercritical technology at Mundra Taluka in Kutch District of Gujarat State in India. The
project was one of several ultra mega power projects planned by the government of India to ease
India’s chronic power supply deficit and to achieve the goal of “Power for All” by 2012. The total
project cost was estimated at approximately $4.23 billion, to be funded with debt of $3.17 billion
and equity of $1.06 billion.

The project as proposed was to be based on supercritical technology, a new technology in India
at the time, and was expected to have 30%–40% lower emissions than conventional coal-based
power plants. The project aligned with ADB’s Strategy 2020 as energy access and efficiency was
a core area of operation under infrastructure. ADB’s energy policy review of 2000 stated that if
ADB became involved in coal-fired projects, steps had to be taken to ensure such projects meet
best practice emission standards and that they use cleaner technology. ADB’s energy policy of
2009 stated that selectively coal-based power generation can be supported since energy access
was a basic requirement for achieving the Millennium Development Goals. Hence the project
proposal was compliant with ADB’s strategy and policies related to energy sector in India.

The project was won by TPC, the sponsor, under competitive bidding in December 2006. The
company quoted a levelized tariff of ₹2.26 per unit of power, which included a fuel charge of ₹0.86
per unit, with the remaining components being charges for capacity and transportation and
handling. Of the fuel charge quoted, TPC proposed that 55% be fixed (non-escalable) and 45%
provide for escalation linked to market prices of imported coal. The project would supply power to
the states of Gujarat, Haryana, Maharashtra, Punjab, and Rajasthan under a long-term (25-year)
power purchase agreement. The project was expected to reduce the power deficit significantly.
The project was expected to run on coal imported from Indonesia. TPC had signed a long-term
fuel supply agreement with Indonesia-based suppliers to meet the coal demand for the project. It
also acquired a 30% stake in Indonesia-based coal mines to further secure the supply and provide
a hedge against coal price movements.

Overall, the project has had unviable operations with under-recovery of fuel costs and complaints
by local fisherfolk about impacts on their livelihoods. Yet, it achieved commercial operation as
scheduled in 2013 and substantially achieved the stated outputs and outcomes related to power
generation while demonstrating successful operation of supercritical technology. The project has
been operating broadly at the expected levels. However, it carried a coal price risk on imported
coal for 55% of consumption. In September 2011, a change in regulations took effect in Indonesia
that mandated that coal exporters sell at benchmark market prices determined by the regulators,
even if existing contract prices were lower. In June 2012, the market benchmark price of coal was
$74 per ton, against the average price of $43 per ton factored in the bid by TPC.

TPC tried multiple avenues for obtaining a compensatory tariff to make the project viable. Though
it obtained favorable outcomes in some forums, those successes were overturned in higher-level
forums. The changed circumstances did not trigger a force majeure or a change in law under the
project agreements, according to the courts, because the agreements were subject to Indian laws
and any revision in the parameters of competitive bidding would violate the sanctity of the bidding
process. No relief had been obtained yet at the time of writing this report.
 iii

Local fisherfolk complained about the project’s adverse impact on their livelihoods, and a
compliance review panel found ADB noncompliant with certain of its operational policies and
procedures. The panel’s report cited the failure to conduct adequate consultations with fisherfolk
early in the project design phase and inadequate measurement of impacts on marine ecology by
thermal discharge, among other deficiencies. In response to the findings of noncompliance, the
ADB Board approved a remedial action plan prepared by the Private Sector Operations
Department. Based on the findings of the compliance review panel, agreements were reached on
measures to be implemented to address the impacts, and their implementation was monitored
annually for three years until the refinancing of the ADB loan.

ADB provided longer-tenor financing than local banks and the financial closure could have been
delayed without ADB’s participation. ADB did not appraise or adequately highlight the commodity
price risk during due diligence and though the project generally complied with the policy
requirements, a compliance review panel found negative impacts on local communities, some of
which were not assessed during detailed design.

The most significant and most often repeated learnings and recommendations from the project
are the following three: (i) Commodity price risk cannot be carried by project operators or mitigated
through supply contracts, as was noted by the Central Electricity Regulatory Commission in its
interim orders. The most intuitive and logical way to mitigate commodity price risk is with pass-
through escalations in tariffs. (ii) Noncompliance has high costs (iii) Projects with international
linkages require close scrutiny of the risk and dynamics of intercountry markets and, preferably,
the governments of the respective countries should be on board.
 I. THE PROJECT

A. Project Background

1. In April 2008, the Board of Directors of the Asian Development Bank (ADB) approved a
loan of up to $450 million to Coastal Gujarat Power Limited (CGPL), of which $250 million was
funded solely by ADB and $200 million was syndicated through a risk participation agreement.
The loan was for a project that involved the construction, operation and maintenance of a 4,000
MW coal-based power plant using supercritical technology near Mundra Port, at Mundra Taluka
in Kutch District of Gujarat State. Supercritical technology uses a boiler design in which, under
high pressure, steam reaches a supercritical state, resulting in higher thermal efficiency and
hence lower fuel requirements and emissions per unit of electricity produced. The project was
one of the ultra mega power projects (UMPPs) planned by the government of India to ease India’s
power supply deficit and to achieve the target of “Power for All” by 2012. The loan had a tenor of
20 years with a grace period of up to 5 years with semi-annual repayments.

2. India was facing shortages in both supply and distribution of electricity in 2007–2008, with
an overall energy shortage of 9.8% and a peaking shortage of 16.6%; only 56% of households
had access to electricity.1 The power deficits were more acute in the northern and western regions.
Power generated by the project was proposed to be sold to the states of Gujarat, Maharashtra,
Punjab, Haryana, and Rajasthan, thus reducing the deficit considerably. The project was based
on coal but used supercritical technology, which was expected to produce 40% lower emissions
than a conventional coal-based plant.

3. According to the United Nations Development Programme, energy was a fundamental

prerequisite for achieving the Millennium Development Goals: without access to reliable and
affordable energy services, substantial social and economic development simply cannot occur.2
Because of India’s size and population, its greenhouse gas emissions are significant; however,
per capita emissions at the time were 24% of the global average—and just 5% of the US figure,
12% of the European Union figure, and 11% of the Japan figure. Coal was the most widely
available resource in India, with a reserve-to-production ratio of 300 years, whereas crude oil was
at 22 years and natural gas at 30 years, according to a 2008 report by the Ministry of Power.
Scalable and cost-competitive renewable energy technologies were still under development. In
the short to medium term, India was expected to continue to depend substantially on coal for its
energy supply. For more details on the power sector in India, refer to Appendix 3.

B. Key Project Features

4. CGPL, a wholly owned subsidiary of Tata Power Company Limited (TPC, the flagship
power company in the conglomerate Tata Group), was the special-purpose vehicle incorporated
to implement the project. TPC is India’s largest integrated private power utility, with installed
generation capacity of 10,957 MW (as of 31 March 2019).3 It won the Mundra UMPP project in
competitive bidding conducted by the Ministry of Power and the Power Finance Corporation, a
central government-owned entity and nodal agency appointed for UMPPs.

1 Government of India, Ministry of Power. 2008. Growing Energy Needs and Mitigation Options, May 2008. Delhi.
2 United Nations Development Programme. 2007. A Review of Energy in National MDG Reports, January 2007. New
York.
3 CARE Ratings. 2019. Rating rationale, Tata Power Company Limited, November.
2

5. The government had designed the UMPPs located in Mundra to run on imported coal, and
the coastal location of these projects aligned with this design. Despite India’s large reserves of
coal, availability could not keep pace with the growing demand for power generation. The main
reserves were in the eastern region of the country, and coal transport capacity was constrained
and costly. The design of boilers depended on the type of coal. Domestic coal had a high ash
content and a lower calorific value than imported coal, so once the plant was designed for
imported coal it would be difficult to switch. For the imported supply, it was important to procure
good-quality coal with a higher calorific value, lower ash, and lower sulfur content. Lower ash and
sulfur content would reduce the project’s environmental impact. CGPL planned to purchase 11.2
million tons per year of coal, mainly from Indonesia-based suppliers.

6. The total project cost was estimated at ₹169 billion. The project was proposed to be
financed at a debt–equity ratio of 75:25. The sponsor, TPC, was expected to infuse ₹42 billion of
equity; and a group of local and international lenders would provide ₹127 billion of debt. Apart
from ADB with the loan of ₹18 billion, other major lenders were the International Finance
Corporation, Export–Import Bank of Korea (KEXIM), Korea Export Insurance Corporation, and
rupee financing from local banks led by the State Bank of India (SBI) and India Infrastructure
Finance Company Limited.

7. Fuel price risk carried due to tariff structure. The project relied mainly on coal imported
from Indonesia to meet its fuel cost requirements. Bidders could choose the proportion of
escalable and non-escalable tariffs in their bids, on the basis of their market expectations and
linkages. The successful bidder was selected on the basis of the lowest levelized tariff. TPC’s
successful bid had 45% of the fuel charge escalable, linked to the escalation index of the Central
Electricity Regulatory Commission (CERC) for payment for imported coal and 55% was non-
escalable. Both components of the fuel charge were denominated in dollars, thus eliminating the
foreign exchange risk associated with imported coal procurement. About a third of the overall
levelized tariff of ₹2.26 was non-escalable. Components of the levelized tariff of ₹2.26 per unit
tariff in TPC’s successful bid are given in Table 1.

Table 1: Components of Project Tariff

Tariff Component Bid Currency Levelized Bid Tariff, ₹ per unit
Non-escalable Escalable Total
Capacity charge ₹ per unit 0.05 0.83 0.88
Fuel charge per unit $ per unit 0.49 0.37 0.86
Transportation and fuel handling $ per unit 0.20 0.32 0.52
Total 0.74 1.52 2.26
Source: Central Electricity Regulatory Commission. 2013. Committee Report for determination of compensatory
tariff—in the matter of Coastal Gujarat Power Limited. New Delhi.

8. Thus, the project under TPC’s bid parameters carried a coal price risk for 55% of the coal
requirement and carried an inflation risk on 40% of the transportation and handling charges.

C. Progress Highlights

9. Construction and commercial operations achievement. The commercial operation

date (COD) for the five units was revised from September 2011 to March 2013, according to the
supplemental power purchase agreement (PPA) in July 2008. All five units were commissioned
between March 2012 and March 2013 without incurring any penalties. Repayments had started
as laid out in the original repayment schedule, in line with the original COD schedule, but were
 3

met through sponsors’ support with accelerated equity and the infusion of a subordinate loan. For
more details on the project cost and means of finance, refer to Appendix 1.

10. TPC tried to mitigate the fuel price risk through long-term supply contracts with Indonesia-
based suppliers, but a change in Indonesian government regulation that linked the supply prices
to benchmark market prices rendered the contracted prices ineffective. A sustained elevation in
benchmark market prices led to under-recovery of the fuel cost, rendering the project cash flows
unviable at the agreed levelized tariffs. Even in the absence of the change in regulation, the
supplier might not have continued to supply coal based on the supply agreements at substantially
below the market rates for 25 years.

11. Per unit operating profit (operating revenue less fuel cost and operating expenses per unit)
averaged ~₹0.20 per unit between FY13 and FY19 as compared with ₹0.73 in the base case
financial model, the difference being due to higher fuel costs. Those higher costs led to cash flow
shortfalls in meeting debt-service obligations. These matters were made worse by under-hedged
foreign exchange risk, payment of ship deferment charges on coal imports, and coal blending to
use coal with a lower calorific value, which reduced efficiency and increased operational and
managerial expenses. There was no default, because TPC funded the shortfall in cash accruals
of CGPL that was due to under-recovery of the fuel price.

12. TPC had also acquired a 30% stake in two Indonesian coal producers, PT Arutmin
Indonesia and PT Kaltim Prima Coal (KPC) in 2007, which the company had expected would
serve as a natural hedge at the group level and help secure the coal supply at competitive terms.
Arutmin and KPC together produced and exported in excess of 50 million tons of coal in 2016; by
way of a 30% stake, TPC expected to have an effective hedge against increases in the coal price.
The value of the investment and hedging relationship is beyond the scope of this report. The
dividends from the investment, though assigned to lenders by CGPL at a later stage, were
insignificant compared with the cash flow shortfall in CGPL. TPC informed its investors that losses
at CGPL are largely compensated for by profits in the Indonesia coal business.4

13. Tariff revision appeals and litigations. An average tariff increases of ₹0.6 per unit—
which would have resulted in an average tariff of ₹3.04 per unit between FY13 and FY19—would
have rendered the plant viable. CGPL took up this issue with the Ministry of Power in August 2011,
which replied that the PPA is a contract between offtakers and the developer. No legal remedy
against the fuel supplier was available because the supply agreement was subject to the law of
the land. CGPL approached the Indonesian government in February 2012 about exempting the
existing supply contracts from the purview of the new regulations, without success. Upon CGPL’s
petition in 2012, the CERC directed CGPL to approach the offtakers and propose a change in
tariff. The offtakers did not agree to a change. The CERC viewed the matter favorably for CGPL,
while noting that CGPL chose the bid parameter of a 55% non-escalable fuel charge, that linking
fuel prices to market benchmarks cannot be considered a force majeure event, and that a change-
in-law clause did not apply as it does not cover foreign laws. In the interest of good policy, the
CERC decided to grant temporary relief. But the relief orders of CERC and other such forums
were set aside by the courts since under the PPA neither a change in law nor force majeure was
applicable.

14. SBI wrote to the government of India to request that it form a high-powered committee for
the resolution of CGPL and other similar projects. The committee has recommended partial relief,
but the implementation requires that offtakers approve amendments to the PPA. If they approve

4 Tata Power Company Limited. 2018. Investor Presentation and Concall Records, October.
4

the amendments, the amount of the fuel under-recovery is expected to be halved. Though the
company shut down the plant temporarily in March 2020, it restarted the plant again in response
to the promise of tariff relief and subdued coal market prices.

15. Unsuccessful registration for the Clean Development Mechanism. CGPL applied for
the Clean Development Mechanism (CDM) registration in 2010, but the application and
subsequent revisions have been rejected as the project could not demonstrate “additionality” –
that is, the CDM credits would not catalyze any additional emission reductions because the
supercritical technology was mandated by the government for the UMPPs. Also, all of the
financing for the project was in place without the CDM registration, and therefore barriers to
investment without CDM support could not be substantiated.5

16. The total amount disbursed was $351.2 million, serviced through sponsors’ support until
H1 FY19, and the entire outstanding amount was refinanced in the same period. Because of the
sponsors’ support, repayment conduct for the disbursed portion was satisfactory through the
prepayment in FY19.

II. EVALUATION

A. Project Rationale and Objectives

17. Infrastructure was a core area of operation under Strategy 2020, which established that
ADB would invest in expanding energy supply and promoting energy efficiency through supply-
side and demand-side measures.6 ADB’s energy policy review of 2000 stated that if ADB became
involved in coal-fired projects, steps had to be taken to ensure such projects meet best practice
emission standards and that they use cleaner technology.7 The ADB energy policy approved in
2009 8 recognized that the Millennium Development Goals could not be met without modern
energy services and that to meet electricity needs would require large additions of capacity, which
would expand the use of coal-based generation. The policy stated that ADB would selectively
support coal-based power projects if they adopted cleaner technologies. The project introduced
a more efficient technology at a large scale, thereby avoiding emissions that would have resulted
from smaller and less efficient projects. Thus, the project aligned with ADB’s strategy and policies.

B. Development Impact

1. Contributions to Private Sector Development and ADB’s Strategic

Development Objectives

18. The project substantially met the stated outputs and outcomes. For actual achievements
compared with targeted outputs and outcome, refer to Appendix 5. The losses due to under-
recovery in fuel prices and unsuccessful CDM registration affected the value of the project as a
demonstrable model, but valuable lessons have been learned nevertheless. Delays in dispute
resolution and legal proceedings have worsened the results, but the viability of supercritical
technology at a large scale has been demonstrated successfully. The project has been generating
energy and operating above 80% availability. There was a reduction in peak and net energy

5 Clean Development Mechanism (CDM). 2011. Comments on the Second Project Design Document and Application
for Validation after Rejection of Registration by CDM Executive Board, July.
6 ADB. 2008. Strategy 2020: The Long-Term Strategic Framework of the Asian Development Bank, 2008–2020. Manila.
7 ADB. 2000. Energy 2000: Review of the Energy Policy of the Asian Development Bank. Manila. Para. 176.
8 ADB. 2009. Energy Policy. Manila.
 5

deficits in the offtaker states, as shown in Appendix 5. For details on the contribution assessment,
refer to Appendix 2.

19. In considering the performance of the project in terms of its contribution to private sector
development and ADB’s strategic development objectives, this report noted the negatives
resulting from the tariff structure, which did not allow pass-through of fuel price risk and
compliance issues with respect to environment and safeguards. Nonetheless, given the
unprecedented scale of the project, the successful deployment of supercritical technology, which
reduced emissions, as well as the satisfactory operation of the plant for more than 7 years, the
reduction in energy deficits in the offtaker states from operation of the project, and the alignment
with ADB’s strategy and policies have been noted.

2. Environmental, Social, Health, and Safety Performance

20. Environmental, Health, and Safety Performance. The Summary of Environmental

Impact Assessment (SEIA) report, environmental management plans (EMPs) for construction and
operation, and monitoring reports of air emissions, ambient air quality, thermal discharge,
groundwater and marine water quality, soil quality, and noise quality as well as the marine
ecological survey among others from April 2008 to September 2017 have been disclosed on
ADB’s website. Measured indicators met the local standards and the World Bank Group’s
Environmental, Health and Safety (EHS) Guidelines on air emissions, ambient air and noise, with
the exception of reported exceedances in particulate matter of 10 microns (PM10) in some
localities. The thermal effluent discharges were compliant with the regulatory requirement. CGPL
appointed a chief sustainability officer, who was responsible for onsite environmental and social
initiatives and also established an integrated management system, which has been International
Organization for Standardization (ISO)-certified since July 2014.

21. A complaint against the project was lodged with the Compliance Review Panel (CRP) in
October 2013 on environmental and social issues, including a reported impact on marine ecology
and access restrictions affecting the livelihoods of local fisherfolk. The CRP found ADB
noncompliant with its operational policies and procedures. The compliance report found that ADB
staff had paid careful attention to the implementation of mitigation measures to reduce coal dust
and fly ash pollution in Vandh, a village located immediately adjacent to the CGPL plant and near
the Adani plant. The CRP considered that ADB had exercised due diligence and acted in
accordance with para. 67 of the ADB Environment Policy. But it identified inadequate baseline
data in relation to (i) disclosure of information and conduct of consultations, (ii) thermal discharge
from the outflow channel and loss of livelihood of fisherfolk, (iii) sludge treatment and disposal,
(iv) restrictions of access to fishing grounds, and (v) ambient air quality.

22. The thermal discharge modeling in 2009 estimated the increase in seawater temperature
due to the effluent from the plant to be about 2oC–3oC within 2 kilometers (km) from the seaward
end of the channel, which was deemed unlikely to adversely affect the ecology. Actual results
showed compliance with the regulatory standards of a maximum of 7ºC temperature difference
but exceeded the 2008 World Bank Group’s EHS guidelines of 3oC. This became one of the key
issues raised later against the project by a CRP. Also, ADB Environmental Policy (2002) required
the use of environmental standards and approaches in monitoring emission and effluent levels
stipulated in the World Bank Group’s Pollution Prevention and Abatement Handbook (PPAH).
However, the SEIA contained incomplete information on standards to be applied and instead
adopted Indian regulations for the cooling water discharge. This was also one of the proofs of
noncompliance found by the CRP; ADB management also agreed that the project should have
recorded a justification for adopting the India regulations instead of the PPAH.
6

23. In response to the findings of noncompliance, the ADB Board approved the Remedial
Action Plan (RAP) prepared by ADB’s Private Sector Operations Department to bring the project
into compliance with ADB’s operational policies and procedures. CGPL has exerted considerable
effort to meet the RAP requirements and worked with ADB in implementing these actions. The
CRP’s third annual monitoring on the RAP indicated that remedial action on sludge treatment was
closed while the rest were only partially compliant. The CRP findings on sludge treatment was
refuted by the Gujarat Pollution Control Board. CGPL prepaid the loan to ADB by the end of 2018,
which limited opportunities for ADB to monitor the remaining action items.

24. Social Safeguards. At the time of project preparation in 2008, the modeling9 carried out
for the water discharge from the once-through cooling system did not identify any impacts on any
fishing grounds, including for fisherfolk on foot.

25. A RAP was prepared in response to the CRP findings of noncompliance. The RAP
addressed issues related to the livelihoods of foot fisherfolk and to access restrictions. ADB
conducted a study on access restrictions which concluded that despite the increase in length, all
users of Tragadi Bander benefited directly from more transport facilities, resulting in reduced
travel time and the provision of all-weather access for trucks to take fish from the Bander, thus
positively affecting business prospects. The cost increases resulting from greater travel distances
were offset by the benefits accrued to the Tragadi Bander residents through the various corporate
social responsibility initiatives by CGPL.

26. To address ADB’s noncompliance in relation to the CRP’s findings on thermal discharge
from the outflow channel and loss of livelihood of fisherfolk, CGPL engaged Swadeep to identify
pagadiya fisherfolk who were affected and to prepare a livelihood improvement plan. Financial
support was given to the 24 pagadiyas. CGPL initiated measures to establish long-term
improvements through the development of shrimp farms, the commencement of which was
delayed for government approvals and had not been completed when CGPL prepaid the loan.

27. Conclusion. The project has generally complied with the requirements of the ADB
Environment Policy (2002), Involuntary Resettlement Policy (1995) and the national and local
regulations of the government of India. Nonetheless, the CRP found that the project had a
significant negative impact on the health, livelihood and socioeconomic conditions of nearby
communities. Compliance with the implementation and monitoring requirements of the CRP was
noted. CGPL also completed a two-year air quality monitoring requirement, a health impact
assessment, and a detailed analysis of air quality and emission data required by the RAP. CGPL
did not conduct further thermal discharge modeling and monitoring as it considered the model
conformity study sufficient. Consultation in the local language on the findings of the analysis of
ambient air quality and emissions data was still pending at the time of loan prepayment. ADB has
had only limited opportunities to monitor completion of the consultation and RAP implementation
since CGPL prepaid its loan.

9
See the Rapid Marine Environmental Impact Assessment of the Ultra Mega Power Project (p. 79), dated January
2007. This was further confirmed in the Marine EIA (see p. 87) done for the discharge channel of the project in February
2009. https://www.tatapower.com/pdf/cgpl-mundra/NIO-Study-Feb-09.pdf.
 7

C. ADB Additionality

28. ADB provided longer-tenor financing for the project than the local commercial banks did.
The project scale and the employment of super-critical technology were firsts in the sector, and
financial closure required participation by a broad set of financial institutions. Without ADB’s
participation, the project probably would still have gone ahead with financing tied up from the
market, given the standing of TPC and Tata Group, albeit with possible delays in financial closure
and a shorter tenor of financing.

29. Given the scale of the UMPPs and the quantity and tenor of the investment and the
financing required along with it, the projects were difficult to initiate. Of the 15 UMPPs
conceptualized, only 4 were awarded. Demonstration of supercritical technology in India at a large
scale has been successful, and ADB’s involvement eased the financial closure and brought in
additional financing through risk participation.

D. ADB’s Work Quality

30. Screening, appraisal, and structuring. The project carried an unmitigated commodity
price risk for the coal price because of the tariff structure and the nature of coal supply
arrangements, which the RRP did not elaborate on adequately. The environmental impact
assessments did not anticipate the re-alignment of the outfall channel and missed the assessment
of impact on local fishing communities.

31. Monitoring and supervision. Periodic updates were received and reported. Waivers,
amendments and consent requests were addressed within reasonable time frames with
temporary waivers for the breach of the financial covenants and the hedging policy.
Disbursements of approximately $99 million were withheld for noncompliance. However, a
significant portion of the disbursements was made after Indonesia promulgated new regulations
in September 2010. By that time Indonesian coal prices were already double the 2006 price
assumed by the developer in the bid. ADB made extensive efforts to work with CGPL in
addressing the CRP findings on noncompliance.

III. ISSUES, LESSONS, AND RECOMMENDED FOLLOW-UP ACTIONS

A. Issues and Lessons

32. Funding projects with commodity price risk. The project carried an unmitigated coal
price risk. The concessionaires were in no position to manage the commodity price risk and the
only feasible mechanism for doing so would be an escalation mechanism available in tariffs, as
CERC noted in its 2013 order.

33. Long-term fixed-price supply contracts and mitigation of commodity price risk.
Long-term supply contracts cannot assure supply below market rates. Agreements are only as
good as the damages available for noncompliance, as there is a chance that a supplier will prefer
to default on the contract and sell to other parties at market rates.

34. Financing projects with international linkages. Changes in foreign laws and market
conditions may not be eligible for relief under a contract with domestic counterparties, as the
contract may be subject to only domestic laws. International linkages expose a project to changes
in international law and market dynamics that require detailed due diligence on those aspects, as
adequate remedies may not be available under domestic contracts.
8

35. Validation of assumptions under competitive bidding. Assumptions and parameters

quoted by the bidder in contracts won under competitive bidding should be closely scrutinized,
especially differentiating between parameters set by the bidding process and parameters
assumed by the bidder.

36. Assessing adherence to the principles of the CDM mechanism. The project could not
demonstrate adherence to the CDM principles of additionality and investment barriers, and thus
it could not achieve CDM registration.

37. Financing local currency projects with foreign currency funding. The first covenant
breach was attributed to adverse foreign currency movement, and the company remained
noncompliant with the hedging policy for an extended period.

38. Cost of noncompliance: A key lesson learned in this project from the safeguards
perspective is the cost of noncompliance. The acceptance of a complaint as eligible by the CRP
results in negative media coverage and also triggers a large commitment from the operations
department to support the panel in its work. After the CRP draft report is issued, further work is
required to provide inputs to the ADB management review. When the report is finalized, the
department then assists the borrower in implementing the agreed action plan. Since 2013 ADB
has spent over $500,000 in staff time and travel costs on dealing with the Mundra complaint.

B. Recommendations and Follow-Up Actions

39. To be eligible for ADB assistance, projects should not carry commodity price risk. Specific
due diligence on commodity price risk and any pass-through available should be carried out for
financial assistance over a set threshold of, say, $10 million. Key assumptions used by the
successful bidder should be laid out clearly at the time of appraisal and revalidated before
approving assistance and before each disbursement. Damages available in contractual linkages
should be commensurate with the risk of default, loss in case of default, and contract value. For
long-term projects, the contracts should preferably include damages equal to revenue loss on
account of a default by a supplier or contractor. Any revenues or costs that are not linked to market
prices with adequate pass-through should be laid out separately in the investment appraisal.

40. For projects with international linkages, ADB should prefer contracts with government
counterparties and should obtain a “no objection” or an “in principle” consent from the respective
governments before extending financial assistance.

41. As a matter of policy, ADB should not consider assisting projects that use financing of
more than 25% foreign currency, earn revenues in local currency, and lack adequate upfront
hedging. Specific deviations could be approved case by case. Covenants and sponsor
undertakings cannot substitute for the risk as compliance cannot be guaranteed and often lags,
leading to losses in the case of adverse movements.

42. If revenues from the sale of certified emission reductions are included in the project
appraisal, the eligibility of the project under the CDM framework should be assessed and
comparisons made with similar projects using certified emission reduction benefits.
 Appendix 1 9

PROJECT-RELATED DATA

Table A1.1: Investment Identification

1. Country India
2. Project Number 41946-014
3. Loan Number 2419
4. Type of Business Power Generation
5. Project Title Mundra Ultra Mega Power Project
6. Investee Company and/or Borrower Coastal Gujarat Power Limited
7. Amount of Approved ADB Assistance $450 million
ADB = Asian Development Bank.
Source: ADB. 2008. Report and Recommendation of the President to the Board of Directors: Proposed Loan for India:
Mundra Ultra Mega Power Project (Philippines). Manila.

Table A1.2: Investment Data

1. Concept Clearance Approval 31 Aug 2007
2. Date of Board Approval 17 Apr 2008
3. Signing Date of Legal Agreements 24 Apr 2008
4. Date of Loan Effectiveness 5 Dec 2008 (first disbursement)
5. Loan Amount and Date of Initial $450 million approved, $351.2 million disbursed till 2011 with first
Disbursement disbursement on 5 Dec 2008, further disbursement withheld due to
non-compliance, loan fully pre-paid on the date of this report.
Source: Asian Development Bank.

Table A1.3: Summary of Project Cost and Funding Sources

Project Cost RRP Amount Actual Amounta Share of Total
($ million) ($ million) (%)
Total Project Cost 4,226.7 4,620.1 100%
Sources of Funds
Equity 1,056.7 2,049.5 44.4%
Debt
ADB Loan 450.0 351.2 7.6%
Direct exposure 250.0 192.0
KEXIM risk participation 200.0 159.2
Other lenders 2,720.1 2,219.4 48.0%
Total Debt 3,170.1 2,570.6 55.6%
Total Sources of Funds 4,226.7 4,620.1 100%
a
Actual amounts calculated from rupee denominated project cost of committed capex till March 2013 when the last
unit commenced operations, at exchange rate of ₹39.47 per $ prevalent at the time of investment appraisal in Jan 2008.
Source: ADB.2015. Report and Recommendation of the President to the Board of Directors: Proposed India: Mundra
Ultra Mega Power Project (Philippines). Manila.

Table A1.4: Actual vs scheduled COD of five units

Unit As per Original PPA Revised as per supplemental PPA in July 2008 Actual COD
1 February 2011 September 2011 March 2012
2 June 2011 March 2012 July 2012
3 October 2011 July 2012 October 2012
4 February 2012 November 2012 January 2013
5 June 2012 March 2013 March 2013
10 Appendix 2

RESULTS AND RATINGS FOR PROJECT CONTRIBUTIONS TO PRIVATE SECTOR DEVELOPMENT AND ADB STRATEGIC
DEVELOPMENT OBJECTIVES – INFRASTRUCTURE
Potential future
Results area Actual achievements Justification achievements Risk
1. Within company PSD effects
1.1 Improved skills. New or Supercritical technology was demonstrated The project has been A successful Discontinued
strengthened strategic, managerial, successfully via the project. operating successfully resolution of tariff operations due
operational, technical or financial and delivered unviability issue and to unviable
skills substantially on outputs better adherence to tariff.
and outcomes. social and
environmental
safeguards.
1.2 Improved business Operational benchmarks have been Operational performance …
operations. Improved ways to satisfactory. Station heat rate was higher than has been satisfactory
operate the business and compete, design mainly due to issues with appropriate through marginally below
as seen in investee operational fuel supply, but was still higher than benchmarks
performance against relevant best conventional power projects. Availability was
industry benchmarks or standards over 80% though lower than target of 90%, but
still satisfactory considering fuel supply issues.
1.3 Improved governance. As The company missed the assessment and Less than expected due Adherence to action Impacts on
evident in set standards related to mitigation of impact over local fisher folk, even to missed assessment plan for mitigating local ecosystem
corporate governance, stakeholder though the environmental and social impact of impact on fisher folk. impacts and better and livelihoods
relations, EHS fields, and/or energy assessment covered other relevant adherence to social not fully
conservation, and their parameters. and environmental mitigated.
implementation safeguards.
1.4 Innovation. New or improved The project design allocated coal price risk to Unmitigated commodity A successful Discontinued
infrastructure design, technology, the project developer which was not in a price risk resolution of tariff operations due
and service delivery; ways to cover position to manage the same. Benchmarking unviability issue. to unviable
or contain costs, manage demand of coal supply to market prices rendered the tariff.
or optimize utilization; improved risk project unviable.
allocation between private
companies and government;
financial structure, etc.
1.5 Catalytic element. Mobilizing The project did catalyze financing into Power Financing raised from …
or inducing more local or foreign for All initiative as IFC, ADB and KEXIM local and foreign
market financing or foreign direct participated in the financing along with local participants
investment in the company commercial banks.
2. Beyond company PSD effects
2.1 Private sector expansion. The project has successfully demonstrated The project does not A successful Discontinued
Contribution by a pioneering or low- feasibility of super critical technology at a large serve as a role model in resolution of tariff operations due
profile project that facilitates in its scale. However, tariff and compliance issues and compliance areas unviability issue and to unviable tariff.
own right, or paves the way for, have not been helpful in catalyzing more better adherence to
private sector participation. social and
 Appendix 2 11

Potential future
Results area Actual achievements Justification achievements Risk
more private participation in the environmental
sector and economy at large safeguards.
2.2 Competition. Contribution of The project has contributed towards Plant efficiency levels … …
new competition pressure on public mainstreaming of super critical technology in have been higher due to
and other sector players to raise thermal power projects. use of super critical
efficiency and improve access and technology
service levels in the industry
2.3 Demonstration effects. The project has had a negative demonstration Unmitigated commodity A successful Discontinued
Adoption of new skills, improved effect. The coal price risk assumed by the risk allocated to the resolution of tariff operations due
infrastructure assets and services, project was unmitigated. developer unviability issue and to unviable
more efficient processes, better adherence to tariff.
maintenance regimes, improved social and
standards, risk allocation and environmental
mitigation beyond the project safeguards.
company
2.4 Linkages. Relative to The project established linkages with The project relies on … Discontinuation
investments, the project contributes Indonesia based coal suppliers for fuel supply international linkages for of operations in
notable upstream or downstream and with Korean equipment supplier for boiler key supplies. absence of tariff
linkage effects to business clients, and core equipment supply. Capacity relief.
consumers, suppliers, key utilization at Mundra port has improved due to
industries etc. in support of growth. the project.
2.5 Catalytic element. Mobilizing Nil since the project did not catalyze financing Project could not A successful Discontinued
or inducing more local or foreign of other UMPPs. Scenario could have been achieve positive resolution of tariff operations due
market financing or foreign direct different if the project was successful and demonstration effect unviability issue and to unviable
investment in the sector (beyond profitable and did not have compliance issues. better adherence to tariff.
the company) through pioneering or social and
catalytic finance environmental
safeguards.
2.6. Affected laws, frameworks, The project has had a negative demonstration The project tariff has A successful Discontinued
regulation. Contributes to effect by highlighting the legal and structural been a matter of resolution of tariff operations due
improved laws and sector flaws in the PPP model followed for the litigation for about 8 unviability issue and to unviable
regulation for PPPs, concessions, UMPPs and extraordinary amount of time years now. better adherence to tariff.
joint ventures, and build–operate– required for resolution of disputes. social and
transfer projects; and liberalizing environmental
markets as applicable for improved safeguards.
sector efficiency
3. Contribution to other ADB
strategic objectives
3.1 Sector development outputs. The project expanded the efficient thermal The project contributed … Discontinuation
Contribution to other sector power supply significantly given its scale and to power supply capacity of operations in
development outputs and outcomes successful technical operational. expansion absence of tariff
relief
12 Appendix 2

Potential future
Results area Actual achievements Justification achievements Risk
not captured under point 2, such as
capacity or network expansion
3.2 Sector development The project improved energy access and The project contributed … Discontinuation
outcomes. Contribution to other consumption by substantially expanding the to power supply capacity of operations in
sector development outputs and power supply capacity. expansion absence of tariff
outcomes not captured under point relief
2, such as increased infrastructure
utilization or consumption,
improved in-country connectivity,
improved energy security
3.3 Inclusion. Improved access to,
availability or affordability of
infrastructure services for the poor
and other disadvantaged groups
3.4 Job creation. Creation of The project has created substantial Job creation impact has … Discontinuation
additional sustainable jobs or self- employment for local economy in serving the been as expected of operations in
employment; distinguish between project requirements and employees given the absence of tariff
jobs created within and beyond the scale of the project. relief
company
3.5 Environmental sustainability. The project provides more efficient thermal Diligence on impact over Adherence to action Impacts on
Project net impact on GHG power with 40% lower emissions as compared local fishermen was not plan for mitigating local ecosystem
emissions; any other contributions to conventional coal based power plants. carried out impacts and better and livelihoods
to environmental improvements However, there have been negative impacts adherence to social not fully
over livelihoods of local fishermen and water and environmental mitigated.
quality due to thermal discharge. safeguards.
3.6 Regional integration. Project The project has led to increase in cross border
The project has … Discontinuation
contributions to regional trade between Republic of Korea and India significant cross border of operations in
cooperation and integration by during construction phase and between supply linkages absence of tariff
facilitating trade, cross-border Indonesia and India during operations. relief
mobility, cross-border power
supplies, etc.
… = data not available; EHS = environment, health, and safety; GHG = greenhouse gas; PPP = public–private partnership; UMPP = ultra mega power project.
 Appendix 3 13

SECTOR REVIEW

1. Though still robust, growth in developing Asia continues to moderate in 2019 as domestic
investment weakens under a more challenging external environment with slowing global trade
and economic activity, protracted trade tensions between the United States and the People’s
Republic of China, and a global downturn in electronics.1 The growth of Indian economy slowed
to 5.1% in 2019 as compared to 6.1% in 2018. In 2020, impact of coronavirus disease (COVID-
19) has led to a significant downward revision of outlook with negative growth expected and
ratings on watch. The International Monetary Fund, in its October 2020 edition of World Economic
Outlook, stated that it expects India’s economy to contract by 10.3% in FY2021 which is further
lower than Reserve Bank of India’s forecast of 9.5% contraction mainly due to the COVID-19
pandemic and related economic disruptions. However, a sharp recovery is also expected in
FY2022 with 8%–9% growth forecast given for India by various agencies.

Table A3.1: Key Macroeconomic Indicators

GDP CPI Inflation Trade Deficit External Debt Fx Reserves Period end Exchange Rate
Year Growth (%) (%) ($ billion) ($ billion) ($ billion) (₹:$)
FY20 4.2% 5.84% 158 558 476 75.4
FY19 6.1% 2.86% 180 543 412 69.4
FY18 7.0% 4.38% 160 529 370 65.1
CPI = consumer price inflation, Fx = foreign exchange, GDP = gross domestic product.
Source: Reserve Bank of India. 2020. Handbook of Statistics on Indian Economy. Mumbai.

2. India was facing both electricity supply and distribution shortages in 2007–2008 with
overall energy shortage at 9.8%, peaking shortage of 16.6% and only 56% households with
access to electricity. 2 With growing access to energy to support the development goals, the
energy deficit would widen unless accompanied with an equal expansion in power supply. India
has been aggressively pursuing the target of grid connected electricity access for all. India’s GHG
emissions are a significant number due to the size and population of the country, however, per
capita emissions were 24% of the global average and 5% of US, 12% of European Union and 11%
of Japan in 2007. At the same time, coal was the most widely available resource in India with
reserve to production ratio of 300 years while crude oil was at 22 years and natural gas was at 30
years as per Ministry of Power in 2008. In the short to medium term period, India would continue
to depend substantially on coal for its energy supply.
3. Universal household electricity access was a central political commitment in India’s 2014
national elections and the government placed a high priority on following through. In April 2018,
the Indian prime minister announced that India has achieved the target. While the independent
estimates are around 85%,3 the World Bank noted in May 2018 that India is progressing well and
is on its way for achieving full access in early 2020s.

4. By December 2019, India’s power generation capacity has grown over 2.5x times from
2008 with total capacity at 369 GW of which 23% is based on renewable energy.4 However, the
overall economic growth has not sufficiently kept up with the growth in power supply resulting in
excess capacities estimated at 42% in FY19 and declining thermal PLFs. There is a small peak
deficit, but that is mainly due to difference in peak and non-peak hour demand and regional supply

1 ADB. 2019. Asian Development Outlook Supplement, December 2019. Manila.

2 Government of India, Ministry of Power. 2008. Growing Energy Needs and Mitigation Options, May 2008. Delhi.
3 L. Jha. 2018. India Doing Extremely Well on Electrification: World Bank. Livemint.4 May.

https://www.livemint.com/Politics/zQy9vumGt5yQAoG7LT2W3L/India-doing-extremely-well-on-electrification-says-
World-Ba.html
4 Government of India, Ministry of New and Renewable Energy.2020. Annual Report FY20. Delhi
14 Appendix 3

and demand differences which are being mitigated through improved distribution and interstate
procurements. Consequently, thermal PLFs have declined steadily from about ~75% in FY10 to
under 55% in FY20.5

5. At the same time, state power distribution companies have become the weakest link in the
power supply chain due to structural problems which have led to their chronically weak financial
health. The problems are the gap between average cost of supply and average tariff realized
(except a few, all state distribution companies have cost recovery gap ranging from ~₹0 to ₹2 per
unit of power), delays in payment of subsidy dues by state governments and high technical losses
(~19% technical and commercial losses in FY20 as per Moody’s report of July 2020) leading to
accumulation of debt.

6. Power sector is facing headwinds in FY21 from reduced demand resulting from COVID-
19 pandemic. In India power demand is likely to decline by 5%–6% as per ICRA estimates in July
2020 and average plant load factor for thermal plants is likely to decline to ~50% in FY21 from
55% in FY20. This will also worsen the cash flows of state owned power distribution companies
in India which were already facing liquidity pressures and receivables of generating entities from
state owned power distribution companies were at near lifetime high of ~₹1,000 billion in March
2020 as per Moody’s report in July 2020. The situation would be certain to deteriorate if not for
liquidity infusion of ₹900 billion initiated by state owned power sector lenders for the power
distribution companies to allow clearing of their payment dues. The measure was announced in
May 2020 by the Government of India under economic relief package.

5 Moody’s Investor Service. 2020. India Power Sector Outlook, May.

 Appendix 4 15

SUMMARY OF PROCEEDINGS IN TARIFF DISPUTE

1. The borrower and the sponsor attempted multiple ways to make the project viable. Legal
remedy against the fuel supplier was not available since the supply agreement was subject to the
law of the land and any arbitration process could not possibly award damages on the seller since
the seller was acting in accordance with the law of the land.

2. Coastal Gujarat Power Limited (CGPL) took up the issue with Gujarat discom, the lead
procurer, and Ministry of Power in August 2011. Ministry of Power replied in September 2011 that
the power purchase agreement (PPA) is a contract between offtakers and developer. CGPL took
up the issue further with the offtakers in the joint monitoring meeting in February 2012. CGPL also
approached the Indonesia government in February 2012 to exempt the existing supply contracts
from the purview of the new regulations without any success. SBI, the leading local commercial
bank and project lender, wrote a letter to the Ministry of Power, Government of India and the state
government of Gujarat seeking support in revision of tariff.

3. CGPL filed a petition with Central Electricity Regulatory Commission (CERC) in July 2012
seeking revision of tariff mechanism to allow pass through of increased fuel cost due to changes
in regulations which rendered the supply linkages ineffective invoking Force Majeure and
Changes in Law clauses. It can be argued that CGPL had a case since there was a change in
law in Indonesia and in circumstances beyond the developers control affecting the project viability.
CERC first directed CGPL to approach the offtakers and propose a change in tariff. The offtakers
did not agree for a tariff revision. CERC took up the matter in October 2012.

4. The offtakers argued that the change in Indonesian coal regulations only benchmarks the
supply price to the market price and cannot be construed as a Force Majeure or Change in Law.
The offtakers also argued that the Change in Law clause of the PPA relates to the Indian laws
applicable to the project and no relief can be claimed for changes in laws of another country. The
bidder could have quoted the entire energy charge as escalable in the bid. The success of the bid
was based on Tata Power Company’s (TPC) quote based on their market expectations and any
changes in price of coal supply from Indonesia is beyond the scope of provisions of the PPA as
the sourcing of the fuel and its price were at bidders discretion. Even for the escalable component,
PPA provides a formula for escalation based on indices to be notified by CERC and no party can
claim an escalation other than that notified by the CERC. They also argued the TPC’s
management was aware that the benefit of change in foreign law was not available under the
PPA since the issue was discussed in pre-bid conference. They also argued that market prices
are subject to fluctuations and can also drop during the 25 years lifecycle of the project.1

5. CERC viewed the matter favorably for CGPL, while noting that the bid parameter of 55%
non-escalable fuel charge was chosen by the bidder and linking of fuel price to market
benchmarks cannot be considered Force Majeure event, neither can Change in Law clause apply
since it does not cover foreign laws. CERC considered the fact that the bidder expected to hedge
the price through long term supply contracts which could not be honored, and that the ministry of
power has initiated changes to model PPAs in competitive bidding for including a pass-through
for fuel charges since the bidders are not in a position to bear or mitigate that risk and it must be
passed on to the utility which must then pass it on to consumers. This principle can also work
favorably for the utilities and consumers in the times of lower fuel prices. The commission also
noted that carrying fuel price risk is also adversely affecting the bidding and pushing up the

1 Central Electricity Regulatory Commission. 2013. Order in the matter of Petition No. 159/MP/2012, 15 April. New
Delhi.
16 Appendix 4

levelized tariffs quoted by the developers in recent bids which defeats the purpose of competitive
bidding. The concessionaires should not carry the commodity price risk even for a profit motive
and should focus on operating efficiencies instead.

6. CERC decided to grant relief to CGPL relying on principle established in the past Supreme
Court judgements that absence of an escalation clause cannot be the basis for denying
compensation for actual expenses incurred. 2 However, the commission did not favor
renegotiation of PPA between CGPL and offtakers since that process would violate the sanctity
of competitive bidding process and set a bad precedent for the future. It ordered a temporary relief
considering the events post the PPA with the mechanism for such relief to be decided by a
committee constituted by representatives of the parties, financial analysts and eminent bankers.
Four commission members agreed to the order while one member gave a dissenting opinion. The
said committee was constituted, and a compensatory tariff mechanism based on the committee
report was approved by CERC in February 2014. However, the offtakers appealed against the
CERC order in Appellate Tribunal for Electricity. The tribunal ordered compensatory tariff for the
project in 2016 but its order was set aside by Supreme Court judgement in April 2017 since the
circumstances constituted neither a Change in Law nor Force Majeure under the PPA.

7. In June 2017 CGPL proposed to the offtaker discoms to take over 51% equity of the project
for ₹1. That would have triggered a liquidity event requiring the offtaker discoms to pay the project
lenders. The discoms did not consider the offer.

8. The State Bank of India wrote to government of India in January 2018 to form a high
powered committee for the resolution of CGPL and other similar projects. The committee report
took the grounds of consumer interest in salvaging the large scale power projects and
recommended compensatory tariffs which included ₹0.20 per unit sacrifice by project lenders and
further deduction for Indonesia coal mining profits appropriated by TPC group. In the meantime,
the Supreme Court ruled in October 2018 clarifying its last judgement that an amendment to the
PPA can be done with approval from CERC and directed CERC to suggest amendments to the
PPA within 8 weeks. CERC suggested the requisite amendments which is pending cabinet
approval with various states. If the amendments are approved, the fuel under recovery is expected
to be halved at CGPL after accounting for ₹0.20 paisa deductions for lenders sacrifice and
deductions for mining profits (expected to be ₹0.30 paisa per unit). The relief is expected to be
prospective and not retrospective though extension of PPA by another 10 years is also possible.

9. In August 2020, Tata Power decided to merge Mundra project entity with the parent
company. In a press statement managing director and chief executive officer of Tata Power stated
that since CGPL has already suffered large losses and is facing difficulty in financing its operations
and given the inordinate delay in resolution of the tariff matter, the merger will provide relief
through direct support from the parent company. The company continues to be in discussion with
various state governments and state discoms and hopes to resolve the PPA amendment issue in
the interest of all stakeholders.

2 Tarapur and Company Vs. Cochin Shipyard Limited, Cochin (1984 SCC 680; AIR 1984 SC 1072)
 Appendix 5 17

PROJECT OUTPUTS AND OUTCOMES VS RRP TARGETS

Outcomes Targets Actual achievement

Operating Project achieves gross The plant had operating efficiency of 39.8% in FY14 which
efficiency in coal efficiency of 44% compared improved to 41% in FY17 with use of higher grade coal. The plant
based with baseline of 34% to was initially designed for high grade imported coal, but due to
generation 36% inability to pass on the full fuel price, company has been blending
increased the high grade coal with lower grade coal to save on fuel cost,
which has affected the efficiency.
Introduction of Project demonstrates The plant has been operating above 80% availability.
clean coal viability of supercritical Demonstration of viability of supercritical technology has been
technology in technology operating at successful.
India over 90% visibility
Supply of Peak and energy shortages State wise FY12 FY14
competitively reduced by 50% in five Deficit (%) Peak Net Peak Net
priced electricity states by 2013
leading to Haryana 6.9% 6% 0 0.6%
development of Punjab 20.5% 14.1% 13.4% 1.5%
an efficient Rajasthan 8.6% 7.0% 0.1% 0.3%
electricity market Gujarat 19.1% 1.6% 0 0
Maharashtra 27.3% 18.9% 8.6% 2.1%
Source: Central Electricity Authority.
Power requirements under The PPA required minimum 80% availability of the capacity which
the PPA met has generally been achieved on an average basis. Average
availability was 83% in FY14, FY15 and FY17.
Mitigation of Project generates 28 million The gross efficiency of the plant has been between 39.5% to 41%
Green House tons of CO2 savings over 10 in FY14–FY18 period which is 10% to 13% higher than an
Gas emissions years average coal based plant in India which would have a heat rate of
~2,500 Kcal / unit implying an efficiency of 34.4% and emissions
of 1.04 tons / MWh.a A 1% improvement in efficiency reduces
emissions by 2%–3%. As per company estimates, the project
would result in emission savings of 3.6 million tons per annum.b

Outputs Targets Actual achievement

Increased Five units of 830 MW The COD schedule under the PPA was revised due to delays in
electricity commissioned and all units obtaining deliveries of materials, delays in construction and
generation operating by July 2012 delays in commissioning of evacuation infrastructure by the
capacity central government enterprise responsible for the same. The
revised COD schedule for the 5 units begins as per the
supplemental PPA dt July 31, 2008 was from Sep 2011 to Mar
2013. All the five units got commissioned between Mar 2012 and
Mar 2013 without incurring any penalties. The commissioned
capacity is 4,000 MW (5x800 MW) as per the PPA and not 4,150
MW (5x830 MW).
Use of more First coal plant based on The plant has been operating successfully and has been meeting
efficient coal supercritical technology the minimum availability requirements under the PPA.
technologies operating in India
COD = commercial operations date, MW = megawatt, MWh = megawatt-hour, PPA = power purchase agreement.
a Central Electricity Authority. 2018. CO Baseline Data for Indian Power Sector, June. New Delhi.
2
b Tata Power Company Limited. 2013. Press release, 26 July. Mumbai.

Source: Asian Development Bank.