Power firms can pass on burden to consumers, stocks rise up to 2%.
Ending a year-long drama surrounding supply of coal to power plants, the Union Cabinet on Friday allowed power companies to pass on to consumers the extra cost of importing coal to bridge the domestic fuel shortage. The decision will need regulatory go-ahead. If cleared, it will increase the electricity price in the country by an average 20-25 paise per unit.
The Cabinet decision covers 78,000 Mw of power capacity commissioned in six years through March 2015. Over 36,000 Mw of this has already come on stream since March 2009. “Costly power is better than no power. More than Rs 1 lakh crore has already been invested in setting up around the 25,000-Mw capacity stranded at present. The choice is between paying more for electricity or having no electricity at all,” Finance Minister P Chidambaram said, announcing the decision.
The finance minister, who was accompanied by Coal Minister Shriprakash Jaiswal, said it was difficult to work out the exact quantum of increase in power rates, as it would vary from one power plant to another. He added implementing the decision would require modifications to the coal distribution policy and tariff guidelines.
The government had last year asked state-run miner, Coal India Ltd (CIL), to meet power companies’ coal demand, corresponding to at least 80 per cent of their annual contracted quantity (ACQ). The Cabinet has now decided CIL would meet 65 per cent of ACQ through domestic linkages in the current financial year. To meet the balance supply obligation, CIL will supply imported coal and supply on a cost-plus basis. The power firms would have the choice of importing coal on their own. Actual supplies would begin only after power purchase agreements (PPAs) are signed.
“We have advised the electricity regulator (CERC) to allow the increased cost of imported coal as a pass-through on a case-to-case basis, to ensure power investments remain viable,” Chidambaram said, calling the pass-through only an interim measure. He added power plants with more than 4,660 Mw of capacity would be left without assured coal supply even after today’s decision.
CIL will have to import six mt coal in the current financial year to meet the shortfall. “This import quantity would vary every year, depending on how many FSAs (fuel supply agreements) materialise. However, there would not be any need for imports in the terminal year (2016-17) at 80 per cent commitment level, given the growth in our coal production,” CIL Chairman S Narsing Rao told Business Standard. He also said power firms were likely to opt for sourcing imported coal through CIL, owing to assurance of supply and competitive prices.
The approval for pass-through cheered the power industry. “The Cabinet decision breaks the fuel impasse that was threatening the viability of the generation segment in the power sector and creating systemic risk for the banking sector,” said Ashok Khurana, director-general, Association of Power Producers.
The country’s largest private power generator, Tata Power, called for a similar mechanism for imported coal-based projects. “Such projects have been impacted due to extraneous factors beyond the control of developers,” the company said in a statement, referring to its 4,000-Mw Mudra project in Gujarat. The power regulator had recently allowed a compensatory tariff increase for the project after costly imported coal jacked up costs.
The government had originally asked CIL to meet supply obligations for projects with 60,000 Mw capacity. It was later increased to 78,000 Mw after taking into account the 7,000-Mw projects with valid letters of assurance (LoAs) and likely to be commissioned by March 2015, and 11,000 Mw of capacity that has been granted tapering linkages. However, today’s decision might lead to legal complications, as a sizeable chunk of this capacity has been set up through competitive bidding for tariffs.
According to the decision, CIL will continue supplies for the plants commissioned before 2009 at 90 per cent of ACQ.
For those commissioned after 2009, its supply commitment would increase gradually from 65 per cent this year to 75 per cent in the terminal year of the current Plan period. CIL produces 452 mt coal annually, leaving a shortfall of 120 mt, which is met through imports.