Fix the tariff

Power woes can't be solved by coal alone

The government’s recent announcement on an action plan to ensure the supply of adequate amounts of coal for new power projects with an estimated capacity of more than 50,000 mw is a significant step, though how far it will help resolve the electricity sector’s problems is a moot point. The action plan, approved by a committee of secretaries with none else than the prime minister’s principal secretary at its head, stipulates that Coal India Limited will sign fuel supply agreements with power producing companies that will commission projects before March 2015 and for which they have entered into long-term power-purchase agreements with distribution entities. And for power plants that have been commissioned by December 2011, the fuel supply agreement will have to be signed before the end of the current financial year. If Coal India fails to meet its commitment under the fuel supply agreeement, it will have to arrange for the supply of coal through imports. 

The problem afflicting India’s power sector, however, is far more complicated and merely preparing a plan for fuel supply arrangements is not enough. The coal shortfall for existing and future power plants coming up until 2015 is about 150 million tonnes, but imports have been planned for only about 65 million tonnes so far. That will leave a huge gap. Even if Coal India manages to arrange for more imports, the cost of such imported feedstock for the power plants will be substantially more. Power generating firms may, therefore, insist on a pass-through of the higher coal prices to customers through appropriate modifications in their power-purchase agreements with utilities. This issue too needs to be resolved. Determining what the pass-through cost should be could pose a policy challenge. Private power firms have acquired coal mines abroad and these mining ventures are benefiting from a higher coal price. The question would be whether they too should be allowed to benefit from a pass-through of the higher cost on account of coal imports.

A more durable solution to these problems lies in the way power distribution companies have been selling power to their consumers. In spite of a regulatory structure in place in almost all states, power distribution companies have so far been either reluctant to revise tariffs in tune with the rise in their costs, or have been persuaded by the political leadership in many states to not press for a hike. As a consequence, the finances of power distribution companies have worsened; their accumulated losses have crossed Rs 82,000 crore. The way out of this financial mess is not to just restructure the distribution companies and enforce a viable payment recovery mechanism, but also to facilitate their move to revise power tariffs within the norms stipulated by the electricity regulators. Already, power distribution companies in states like Maharashtra, Tamil Nadu, Andhra Pradesh and Rajasthan have proposed what seems to be a steep hike in tariffs to make good the losses they incurred in the past. While these proposals should be vetted by the regulator in due course, and what is reasonable should be granted, the fact that distribution companies are willing to charge a remunerative price for the power they sell will send out a positive signal to all power producers and will help bolster confidence of those who intend to set up new power projects.