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What could be the cost of implementing the Union cabinet’s latest prescription for ailing power companies?
A Business Standard analysis reveals the cost is a whopping Rs 10,560 crore of additional burden on consumers through higher tariffs resulting from high cost coal imports. And this is a conservative estimate.
A Business Standard analysis reveals the cost is a whopping Rs 10,560 crore of additional burden on consumers through higher tariffs resulting from high cost coal imports. And this is a conservative estimate.
The analysis puts in perspective what finance minister P Chidambaram called “a minor increase in power prices” while announcing the cabinet’s decision last Friday. It is based on an assessment of the volume of coal imports to be undertaken to bridge the shortfall in domestic supply and arriving at the additional financial burden to be passed on to consumers by deducting the cost of extra coal, if it were to be supplied under notified prices, from the value of imports.
The cabinet decision seeks to ease coal availability for 78,000 Mw of generation capacity commissioned between April 2009 and March 2015. This includes projects of 18,000 Mw capacity without firm coal demand -- based on tapering linkages and left out projects. The rest 63,495 Mw capacity projects would have to be supplied at least 214 MT or 65 per cent of their normative coal requirement by state-owned Coal India Ltd (CIL) domestically.
The balance 15 per cent, or 32 MT, of the power companies’ coal demand would have to be met through imports either through CIL or directly. In either case, companies would have to shell out upwards of Rs 14,080 crore for sourcing the costly imports at a price of $80 per tonne (Rs 4,400 per tonne at a Rupee-Dollar conversion rate of 55). Indonesian origin coal from East Kalimantan, which represents a bulk of Indian thermal coal imports, with calorific value of 5,800 Kilocalorie per Kilogram landed at Vizag port on 17 June was priced at $76 per tonne.
The same coal, if sourced from CIL under the notified prices, would cost Rs 3,520 crore at an average cost of Rs 1,100 per tonne charged from power utilities currently. The balance of the two, Rs 10,560 crore, would be passed on to consumers on an annual basis. With power ministry set to advice CERC to allow this pass through on a case-to-case basis, coupled with necessary amendments in the coal distribution policy and tariff guidelines, stage is set for a nation-wide tariff hike between 20 paise and 25 paise per unit.
Also, the government has managed to solve the fuel supply issue by only changing the level at which pooling occurs. So, the original proposal of coal price pooling, opposed tooth-and-nail by state governments, became pooling at the level of power tariffs in the name of “cost pass-through”. Experts, therefore, say states may refuse to fall in line with the cabinet’s decision. Consider this: the higher cost incurred in generating 15 per cent of the total power produced in any one of the projects which is part of the 78,000 Mw capacity would be borne by 100 per cent of its consumers and that, too, across states.
This, however, is not the only reason why implementing the cabinet’s decision of pass-through would be a challenging task. “Some companies, particularly those with large-sized operations, may find it more feasible to import themselves than sourcing from CIL. This, when combined with pass-through may lead to transparency issues and regulatory challenges,” said Dipesh Dipu, Partner at energy and resources focused consulting firm Jenisse Management Consultants. The key beneficiaries of the government’s decision include Adani Power, Essar Power, Lanco and GMR Infrastructure, IDFC Securities said in its latest research report.
