Private power producers, with a capacity of ~10 GW, who bid the highest at the recently concluded coal block auctions, are staring at ~65 paise per unit under-recovery in variable cost because of aggressive bidding. Consequently, these players could clock under-recovery of ~Rs 13.50 billion in 2015-16 because variable tariffs will not cover mining costs and production-linked payments to government. This assumes the players will be able to enter into power purchase agreements (PPAs) for 85% of the capacity. CRISIL Research estimates the deficit could rise to over Rs 45 billion once allotted coal blocks reach peak production.

Therefore, to safeguard returns, they will have to evaluate increasing fixed tariffs. But developers who have already signed PPAs-accounting for a third of the 10 GW capacity -will not have this option. Even those that are yet to sign PPAs will find it difficult to quote significantly high fixed tariffs due to intense competition. So the offset available, at best, will be partial.

This will put further pressure on the financial position of private power generators, which was already stretched with an estimated high gearing of about 3 times at the end of 2013-14.

Prasad Koparkar, senior director, said, CRISIL Research, ''The aggressive bids indicate the big premium on fuel security. Bid winners have agreed to forego, on average, mining costs of ~Rs 650 per tonne and pay an additional premium of ~Rs 400 per tonne to states in 2015-16. To offset the resultant 65 paise per unit under-recovery in the variable tariff, recently commissioned or under-construction projects will require an average first-year fixed tariff of close to Rs. 3.5 per unit. That's ~30% more than average fixed tariff quoted in the PPAs signed during the last two years. This will be challenging.''

The ability of developers to quote higher fixed tariffs may be limited because there is a risk that at some point regulators will cap the fixed tariffs since the stated objective of reverse bidding is to ensure lower tariffs to consumers. What will also curb big increases in fixed tariff is the likely intense competition for signing new PPAs.

Rahul Prithiani, director, CRISIL Research, said, ''As per our estimates, 22-25 GW of power projects -both operational and expected to be commissioned by 2016-17-are untied and will compete for new PPAs. State discoms, however, have signed just ~8.5 GW of long-term PPAs in the last 3 years because of stretched financials, large capacity of existing PPAs, and sluggish power demand. This will restrict any sharp increase in fixed tariffs.''

CRISIL Research believes that while the auctions have addressed fuel supply concerns, it will be the timing and quantum of fresh PPAs that will determine the financial health of power projects.