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The financial viability of power plants fuelled by CIL coal has been hit because the miner has been unable to meet the promised demand. Photo: Noah Seelam/AFP (Noah Seelam/AFP)
The financial viability of power plants fuelled by CIL coal has been hit because the miner has been unable to meet the promised demand. Photo: Noah Seelam/AFP
(Noah Seelam/AFP)

Consumers face fresh power tariff hikes

Government rejects coal price pooling, moves closer to allowing projects assured fuel linkages by CIL to import coal

New Delhi: The government rejected a proposal to pool coal prices and instead moved a step closer to allowing power projects that had been awarded through competitive bidding and assured fuel linkages by state-owned miner Coal India Ltd (CIL) to import the fuel and pass on the incremental costs as higher electricity tariffs.

Price pooling refers to the averaging out of cheaper domestic coal with costlier imports as a means of helping those who have to depend on supplies from overseas. The rise in fuel costs has led to power projects languishing in country that needs them in order to boost flagging economic growth.

While projects with a capacity of 36,000 megawatts (MW) do not face this issue as they were awarded on a cost-plus basis, other projects awarded after 2009 may be made eligible for the arrangement. The cabinet committee on economic affairs (CCEA) on Monday asked the ministries of coal and power to draft a proposal within three weeks that allows for the pass through of the additional fuel costs.

While such an arrangement will increase the electricity tariff for consumers, it will restore investor interest in the sector. The financial viability of power plants fuelled by CIL coal has been hit because the miner has been unable to meet the promised demand. The government is hoping the changed terms together with the fresh round of approvals for hydrocarbon blocks by the cabinet committee on investment will kick-start investment activity in the infrastructure sector.

“Post-2009, 36,000MW, which have cost-plus PPAs (power purchase agreements), that is not a problem. For the rest, it is work in progress. The committee, which was looking into it, will come back to the CCEA in three weeks. Remaining being the ones which have tariff-based linkages, which have no PPAs or which have tapered linkages. For them, it is work in progress," said a cabinet minister who was present at the CCEA meeting requesting anonymity.

“There is nothing called price pooling. Price pooling is out of the window. There are only four categories—those who have normal PPAs (pre-2009), those who have cost-plus PPAs, those who have tariff-based PPAs, and those who have no PPAs," the minister added.

CCEA on 5 February had given “in principle" approval to the pooling of imported and domestic coal prices. The move would have increased electricity tariffs by around 13 paise a unit and saw opposition from the states. The cabinet was to take a final call on the issue.

Mint reported on 7 March about the finance ministry and the Planning Commission supporting the coal ministry’s view that the government should reject a plan that seeks to sell coal to power plants at a uniform price by taking a weighted average cost of the fuel from local and imported sources.

“After the proposal is worked out and a decision is taken, the government will write to all the state electricity regulatory commissions suggesting they consider the same when pronouncing judgement on tariff increases from those projects that are importing costlier fuel to bridge the gap promised by CIL," said a senior government official requesting anonymity.

India is deficit in coal, particularly from the private sector. Power projects, most of which are fuelled by coal, have been the worst hit by a shortage of the fuel. The power sector is the biggest consumer of coal, absorbing 78% of domestic production.

“CIL had offered coal to these projects. Now they are unable to supply the fuel," the official added.

In the year ended 31 March, CIL missed its production target of 468 million tonnes (mt) by 12 mt although output increased 5.8% year-on-year. It failed to meet production targets in the preceding two fiscal years as well, although output did increase.

A power ministry official, who also didn’t want to be identified, said, “These projects were given letters of assurance by CIL based on which they went ahead and constructed the projects. Now, with CIL unable to supply coal, this is turning into stranded capacity."

Bids for power procurement are sought in two ways. In case-2 bidding, such as for domestic coal-based UMPPs, or so-called ultra-mega power projects of 4,000MW each, resources such as land, fuel and water linkages are identified and in some cases also provided to the developer quoting the lowest tariff. In case-1 bidding, the quantum and time period of power procurement is identified, but fuel type, sources and the plant location are not specified.

“By now, it is well acknowledged that most developers misjudged the severity of domestic coal deficit issue rendering a majority of power purchase agreements signed under the case I/II business model during 2006-11 unviable. There are early talks to scrap the PPAs under the case I/II model and convert them to cost-plus assured RoE (return on equity) model for the initial five years. Thereafter, these projects should enter PPAs under the revised case I/II bidding policy that aims to ensure (a) pass-through of fuel costs and (b) shortening the PPA term to five-seven years versus 25 years currently (for long-term contracts) as it is impossible to take a view over 25 years," Credit Suisse India Research wrote in an 19 April report.

However, this decision may be difficult to implement.

“We see multiple challenges in transitioning case I/II PPAs to cost-plus model," the Credit Suisse report said. These challenges are—arriving at a consensus for power allocation to each state, likely resistance from resource-rich or power-surplus states as this move would increase their cost of power procurement, and obvious litigations involved in scrapping contracts, the report added.

This also comes at a time when the Central Electricity Regulatory Commission, India’s apex power sector regulator, has offered a bailout package to Tata Power Co. Ltd for the electricity generated from its imported coal-based Mundra plant in Gujarat, in a repeat of its earlier judgement on Adani Power Ltd’s petition for a tariff revision.

India has a power generation capacity of 223,343.6MW. Of this, 130,221MW is coal based. Coal demand in India is expected to grow from 649 mt a year now to 730 mt a year in 2016-17, making the country heavily dependent on more expensive, imported coal, given that the projected local availability is only 550 mt per year.

In another development, the cabinet committee on investment cleared 25 out of 31 hydrocarbon blocks that had been awarded under the New Exploration and Licensing Policy (Nelp) rounds. The clearance overrules security restrictions imposed by the defence ministry.

Of these, nine blocks have been granted full clearance while for 16 this is provisional, contingent on certain terms. The cabinet committee on investment’s attempt comes in the backdrop of rapidly diminishing interest in the Indian hydrocarbon sector and the defence ministry barring oil and gas activity or imposing stringent conditions on 40 blocks.

The petroleum ministry had earlier warned the Prime Minister’s Office that the “non-clearance" of blocks awarded under Nelp “may lead to the exodus of foreign firms who were brought in with assurance of conducive investment environment".

A press note on Monday said that “due to clearances given at this meeting, investment already made to the extent of $2.71 billion (around 14,690 crore today) will be put to use and further investment to the extent of $1.9 billion will be made in the exploration activities in the next three-five years".

Out of 40 blocks, 31 blocks have been cleared by the cabinet committee on investment and will bring in an additional investment of $2.5 billion over the next three-five years in exploration activities, the note added.

The cabinet committee on investment also cleared 13 power projects in the transmission, hydropower generation and thermal power generation space with an investment of 33,000 crore.

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