Coal cost pass-through an expensive proposition

Cabinet's efforts to ease power firms' supply problem likely to impact consumers by at least Rs 10,500 cr; states likely to raise other objections, too

The cost of implementing the Cabinet's latest prescription for ailing power companies is very high, shows a Business Standard analysis.

A conservative estimate puts this at Rs 10,560 crore of additional burden on consumers through higher rates of supply, resulting from high cost coal imports. The analysis puts in perspective what Finance Minister P Chidambaram termed "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 needed to bridge the shortage in domestic supply and arriving at the additional financial burden to be passed on to consumers, by deducting the cost of extra coal, if 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. About 63,495 Mw capacity projects would have to be supplied at least 214 million tonnes (mt) or 65 per cent of their normative coal requirement by state-owned Coal India Ltd (CIL) domestically.

About 15 per cent or 32 mt of the power companies' demand would have to be met through imports, either through CIL or directly. In either case, companies would have to pay at least Rs 14,080 crore for sourcing the costlier imports at $80 a tonne (Rs 4,400 a tonne at a dollar conversion rate of 55). Indonesian origin coal from East Kalimantan, the bulk of Indian thermal coal imports, with calorific value of 5,800 Kilocalorie a kg, that landed at Vizag port last week was priced at $76 a tonne. The same coal, if sourced from CIL under the notified prices, would cost Rs 3,520 crore at the average cost of Rs 1,100 a tonne charged from power utilities currently. The balance, Rs 10,560 crore, would be the overall hit on consumers on an annual basis. With the power ministry set to advice the Central Electricity Regulatory Commission to allow this pass-through on a case-to-case basis, coupled with necessary amendments in the coal distribution policy and rate guidelines, stage is set for a nation-wide rate increase of 20-25 p for each 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 rates in the name of "cost pass-through".

Experts, therefore, say states might refuse to fall in line. 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 all consumers and across states. This, however, is not the only reason why implementing the Cabinet's decision of pass-through would be challenging. "Some companies might find it more feasible to import themselves than sourcing from CIL. This, when combined with pass-through, might lead to transparency issues and regulatory challenges," said Dipesh Dipu, partner at Jenisse Management Consultants.

The key beneficiaries of the government's decision include Adani Power, Essar Power, Lanco and GMR Infrastruc-ture, said IDFC Securities in its latest research report.