Finance minister Pranab Mukherjee's Budget proposal to levy “clean energy cess” on coal is likely to prompt merchant power producers to initiate another round of price revisions while the increase in the cost of captive production will have a diverse impact on user industries such as steel and cement. Presenting the country's 2010/11 Budget, India's finance minister proposed levying a "clean energy cess" of Rs 50 (USD 1) on every tonne of coal produced in the country or imported.This levy will go towards the corpus of the National Clean Energy Fund (NCEF), which will fund research and innovative projects in clean energy technologies.
Estimates are that the Rs 50/tonne cess on coal which will fund the new National Clean Energy Fund, will mobilise atleast Rs 3,250 crore in 2010-11. However, in the short run this cess will straight away increase power generation cost by about 3.5-4 paise per unit, which is actually less than 1% of the total cost of generation. Sectors like tea, steel, cement and fertiliser will also see some rise in their costs, since they all depend on coal in some way or other.
Analysts felt that the cess would lead merchant power generators to increase the price of power, which could have an impact on the domestic consumer who already had to face an upward revision last year, when state-owned Coal India (CIL) had revised its prices.
"While we must ensure that the principle of 'polluter pays' remains the basic guiding criteria for pollution management, we must also give a positive thrust to development of clean energy," Pranab Mukherjee told parliament. India's coal production is expected at more than 570 million tonnes for 2010/11, raising the possibility of hundreds of millions of dollars for the corpus of the national clean energy fund.
“Power generators will end up passing the extra cost on. Our estimate is that the tariff impact could be about 3 paise/kWh(kilo Watt hour). But in some states, the regulator may not allow an increase for retail consumers and this will have to be compensated by a higher increase for commercial users,” KPMG head of energy and natural resources Arvind Mahajan said.
An official from the RPG Group's generation flagship CESC confirmed that the increment in input cost would be transferred and the hike in power cost could be in the range of Rs 4-5 paise per unit. “The increase will definitely be passed on,” the official said.
However, for the other major user industries — cement and steel which, together with power — make up for 72 per cent of the coal demand in the country — passing on the burden of the cess will be dependent on demand.
While the steel sector could pass on the burden of the cess on the back of robust demand, the cement sector indicated that it might have to absorb the cost.
Shree Cement Managing Director HM Bangur said: “We will absorb the cost and there will be no increase in the prices. However, there will definitely be an impact on our margins.” French cement major Lafarge said that it would study the implications before taking a call.
The country's largest coal miner, CIL, said that “Prima facie, there would be no impact” on the firm. “But the government needs to quickly formulate a strategy to deploy the Rs 3,000 crore that could be accumulated as part of this cess,” CIL chairman Partha S Bhattacharyya said.
Source- Business Standard