Electricity will likely become costlier to the tune of 15-25 paise per unit for some people, following decision on 21-06-2013 by the Cabinet Committee on Economic Affairs (CCEA) to allow certain power companies to pass on the rising cost of imported coal to consumers. Implementation of pass-through mechanism would lead to increase in electricity tariff. The exact rise in tariff would differ from one power plant to another based on the quantity of imported coal utilised. However, a move to hike natural gas price was deferred as oil minister M. Veerappa Moily was away on an official tour.
The decision, however, applies to only those power plants that were commissioned after March 2009. Such projects have a capacity to produce 78,000 mega watts (mw) of power annually.
Private power producers have been pushing for this decision. Projects totalling another 18,000 MW have been seeking a tapering linkage. That is, the projects have been allocated captive coal mines, but are not operating them. However, the CCEA decision is likely to be opposed by a few States as the average cost of power purchase will increase.
Most of them have been stalled for long or were running below capacity due to lack of coal supply, and will now look for a revival.
Thanks to Friday's decision, the country's leading miner Coal India Limited (CIL) can now import the fuel and supply it to thermal power plants (TPP) on a cost-plus basis. TPPs can also import coal and pass on the cost to their consumers.
The upward power tariff revision is, however, subject to regulatory approvals.
Coal minister Sriprakash Jaiswal said the quantum of tariff hike will depend on the amount of coal imported.
Finance minister P Chidambaram said, "There will be a marginal increase in power tariff. There is a saying that no power is costlier than no power. The choice is, you pay more for electricity or do not get electricity at all. It is better to have power plants working."
CIL can now sign fuel supply agreements (FSAs) with various power plants, potentially adding 78,000 mw to the country's electricity output. Based on the overall domestic availability of coal and actual requirements, FSAs will be signed for domestic coal quantity of 65-75% of annual contracted quantity for the remaining four years (2013-14 to 2016-17) of the 12th Five-Year Plan.
Sources at Tata Power and Reliance Infrastructure (Rinfra), which supply power to Mumbai, said Friday's decision would not impact consumers in the metro. "This order is only limited to domestic coal-based plants that were dependent on imports to meet the domestic coal shortfall, wherein it replaces the earlier planned price-pooling mechanism," said one source.
The Central Electricity Regulatory Commission (CERC) is already receptive to the idea of allowing compensation to power producers for higher prices of imported coal. CERC had earlier given relief to Adani Power and Tata Power by allowing them to raise their tariffs for their plants, both of which are located in Mundra, Gujarat.
According to the Government, this is an interim arrangement to make up for the coal scarcity in the 12th Plan period. The ultimate goal is to increase domestic production of coal as a new plan to open more mines will be rolled out next month, the Finance Minister added. "Therefore, it has been decided that for any of these power projects, if they are commissioned by March 31, 2015, subject to availability of coal, a mechanism will be worked out to supply coal to them."
A report by Macquarie Equities Research said, "Projects of GMR, JSPL, CESC and Adani will benefit significantly."
Ashok Khurana, Director-General, Association of Power Producers, said, "The decision breaks the fuel impasse, which was threatening the viability of the generation segment and creating systemic risk for the banking sector. This will also help reducethe power shortages all over the country."
BJP spokesperson Prakash Javadekar criticised the government decision which will lead to higher power tariffs. "Allowing passing of high cost of imported coal to consumers by the manufacturers will lead to increase in cost of the products for the consumers," Javadekar said. He also said the increase in price of electricity will affect the common people or may lead to load shedding. Javadekar maintained that some units may avoid use of imported coal to cut costs and this will lead to load shedding which will affect the people.
However, the issue now is who will buy this higher cost of power? The industrial sector is facing a slowdown and competition has increased keeping margins under pressure. Higher cost power is unlikely to find its way into their factories. State electricity boards can't even afford the power supplied by producers that use subsidised coal from Coal India, so it is very unlikely that they will buy power at a higher tariff due to imported coal.
These power producers will have to compete with companies like NTPC, which are using subsidised coal. Fearing this competition, power producers had approached the government to pressurise Coal India into bearing the cost of higher imported coal or to sell coal at a blended price. But Coal India, thanks to the effort of its second largest shareholder, The Children's Investment Fund and independent directors did not play ball. Thus, the government is finally compelled to allow these power producers to pass on the rise.