After sitting on it, till all the power equipment is almost rusted, the government has finally allowed power companies to pass on the costs of foreign coal to customers.
For years, power producers have been asking the government to allow them to pass on the rise in coal price to their customers. But the government has not allowed it as the power purchase agreement did not have any such a provision, especially in the case of ultra mega power projects. This policy paralysis on the part of the governance not only resulted in plants being mothballed but also banks terming these assets as toxic.
Good sense seems to have returned only after the government realised that the coal supply agreement of pricing from Coal India is not moving ahead despite a diktat from the President of India in the first quarter of 2012.
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. But finding consumers for its high cost power will be a tall task. Companies may thus have to absorb a part of the price rise and operate with lower profitability. In this scenario, further investment in the sector is unlikely, which the government believes will happen.
