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Recently, the Supreme Court de-allocated 214 of the 218 coal blocks allocated since 1993, through the screening committee route. While various estimates of the losses incurred by power companies due to the judgment are being bandied about, the short-term ramifications for the beleaguered sector might not be as dire as are being made out to be.
According to an Icra report, the de-allocation of 40 coal blocks is likely to impact 37 Gw of capacity in the power sector. Of this, 18 Gw is in the independent power producers (IPP) segment, with the rest is in the state sector. But only a fraction of this capacity---6.3 Gw in the IPP segment and 9.9 Gw in the state sector---is currently operational. With the remaining capacity expected to be operational only through the next two-three years, the short-term requirement is only for the operational 16.2 Gw of capacity (6.3 Gw in the IPP segment and 9.9 Gw in the state sector). (THE DE-ALLOCATION IMPACT)
Assuming one Gw requires 4.3 million tonnes (mt) of coal, the overall coal requirement stands at 69.6 mt, says an expert. As all allottees have been directed to wind up operations by the end of March 2015, a portion of the demand for 69.6 mt is likely to be met through the operational mines. Also, of the 19 affected IPPs, five have tapering linkages (short-term linkages provided until a captive coal block becomes operational), the expert adds.
The rest of the requirement is likely to be met through a combination of imports and auctions. An expert said while there were legitimate concerns about the higher costs of imported coal, one also had to account for the higher calorific value of imported coal while estimating the cost of such coal. Domestic coal tends to have higher ash content, while imported coal has lower ash content and higher calorific value. Factoring this in, the per-unit price differential between domestic and imported coal sees a sharp fall.
The Icra report provides an illustrative example of the cost implications of greater dependence on imports. The cost of captive coal-based generation (4,000 kcal/kg) works out to 70 paise a unit; in the case of e-auctions, this is expected to rise by 70 paise. For imported coal (4,200 kcal/kg), it is estimated this will increase by Rs 2.4 a unit, after factoring in transportation costs, port-handling charges and coal cess. Therefore, while the higher costs of imported coal are bound to lead to an increase in input costs, "as plants don't operate solely on the basis of imported coal, the costs per unit, after pooling coal from various sources, will be lower" says an analyst.
The impact of the high costs (resulting from greater reliance on imports) on the financial viability of these companies depends on the power purchase agreements (PPAs) these entities have signed, says an analyst. In the IPP segment, 4.75 Gw of capacity has agreements based on competitive bids, while an equal capacity is based on cost-plus pricing. Only projects for which the agreements are based on competitive bids, for which changes in fuel costs aren't pass-through, will be affected by greater dependence on imports or auctions. For cost-plus-based projects, as fuel cost increases are pass-through, it will mitigate any risk arising due to higher costs. For the remaining 8.5 Gw of capacity in the IPP segment, power purchase agreements haven't been entered into; most of this capacity isn't operational yet.
In the case of state-owned generation companies, any increase in costs will be passed on to state distribution utilities.
"As state utilities are already incurring huge losses, a rise in costs could be passed on to the end consumer," said a senior officer in the power ministry, adding state electricity regulatory commissions could avail of this opportunity to rationalise rates, which would reduce the burden on state utilities.
The Supreme Court also imposed a levy of Rs 295 a tonne on the coal extracted from the de-allocated blocks so far (irrespective of the grade of coal). Based on an output of 205 mt, it translates into a penalty of Rs 6,000 crore. It is uncertain whether this levy will be paid by state utilities or the joint venture partners.
"Whether state utilities are able to pass it to the joint venture partners will depend on the terms of the contract," says an analyst. What is also unclear is whether Coal India, which will take over these mines, will compensate these companies for investments on the blocks.
