Costly coal to up power rate

Hike in power tariff could be in the range of Rs 4-5/unit.

Finance minister Pranab Mukherjee's Budget proposal to levy “clean energy cess” on coal is likely to prompt merchant power producers to initiate another round of price revisions while the increase in the cost of captive production will have a diverse impact on user industries such as steel and cement.

Mukherjee has proposed a clean energy cess on coal produced in India at Rs 50 a tonne. The cess will also apply to imported coal.This levy will go towards the corpus of the National Clean Energy Fund (NCEF), which will fund research and innovative projects in clean energy technologies.

Analysts felt that the cess would lead merchant power generators to increase the price of power, which could have an impact on the domestic consumer who already had to face an upward revision last year, when state-owned Coal India (CIL) had revised its prices.

“Power generators will end up passing the extra cost on. Our estimate is that the tariff impact could be about 3 paise/kWh(kilo Watt hour). But in some states, the regulator may not allow an increase for retail consumers and this will have to be compensated by a higher increase for commercial users,” KPMG head of energy and natural resources Arvind Mahajan said.

An official from the RPG Group's generation flagship CESC confirmed that the increment in input cost would be transferred and the hike in power cost could be in the range of Rs 4-5 paise per unit. “The increase will definitely be passed on,” the official said.

However, for the other major user industries — cement and steel which, together with power — make up for 72 per cent of the coal demand in the country — passing on the burden of the cess will be dependent on demand.

While the steel sector could pass on the burden of the cess on the back of robust demand, the cement sector indicated that it might have to absorb the cost.

Shree Cement Managing Director HM Bangur said: “We will absorb the cost and there will be no increase in the prices. However, there will definitely be an impact on our margins.” French cement major Lafarge said that it would study the implications before taking a call.

The country's largest coal miner, CIL, said that “Prima facie, there would be no impact” on the firm. “But the government needs to quickly formulate a strategy to deploy the Rs 3,000 crore that could be accumulated as part of this cess,” CIL chairman Partha S Bhattacharyya said.