Power prices set to rise as cabinet okays passing burden of costly coal imports

The decision covers power to be generated by 78,000 Megawatt (MW) of capacity commissioned in six years through March 2015

Ending a year-long drama surrounding supply of coal to power plants, the Union cabinet today approved a proposal to allow power companies to pass on the higher cost of imported coal used to bridge the domestic fuel shortage. Though the decision would need regulatory approvals, the electricity prices in the country are set to rise by an average of 20-25 paise a unit. 
 

The decision covers 78,000 Megawatt (Mw) power capacity commissioned in six years through March 2015. Over 36,000 Mw of this generation capacity has already come on stream since March 2009. “

Costly power is better than no power. Over a lakh crore has already been invested in setting up around 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 Sri Prakash Jaiswal, said it was difficult to work out the exact quantum of the hike in power tariffs as it would vary for each power plant. He also said implementing the decision would require making modifications in the coal distribution policy and tariff guidelines.
 

The government had last year asked domestic miner Coal India Ltd (CIL) to meet coal demand for power companies corresponding to at least 80% of the Annual Contracted Quantity (ACQ). The cabinet has now decided CIL would meet 65% of ACQ through domestic linkages in the current fiscal. In order to meet the balance supply obligation, CIL will supply imported coal and supply on cost-plus basis. The power companies would have the choice of importing coal themselves. 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 over 4,660 Mw capacity would be left without assured coal supply even after today’s decision. 
 

CIL will have to import 6 MT coal in the current financial year in order to meet the shortfall. “This import quantity would vary every year depending upon how many FSAs materialize. However, there would not be any need for imports in the terminal year (2016-17) at 80% commitment level given the growth in our coal production,” Chairman S Narsing Rao told Business Standard. He also said power firms are 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 which was threatening the viability of generation segment in the power sector and creating systemic risk for the banking sector,” Ashok Khurana, Director General, Association of Power Producers said. 
 

The government had originally asked CIL to meet supply obligations for 60,000 Mw capacity projects. It was later increased to 78,000 Mw taking into account power projects of 7,000 Mw capacity which have valid Letters of Assurance (LoAs) and are likely to be commissioned by March 2015 and 11,000 Mw capacity which has been granted tapering linkages. However, today’s decision may lead to legal complications as a sizeable chunk of this capacity has been set up through competitive bidding for tariffs.   
 

As per the decision, Coal India will continue supplies for plants commissioned pre-2009 at 90% of ACQ. For post-2009 projects, Its supply commitment would increase gradually from 65% in the current year to 75% in the terminal year of current Plan period. CIL produces 452 MT coal annually, leaving a shortfall of 120 MT which is met through imports.