Last week, the Cabinet Committee on Economic Affairs (CCEA) stepped in to address the question of coal pricing for power plants. Finance Minister P Chidambaram, announcing the CCEA's decision, said that "we have advised the electricity regulator [Central Electricity Regulatory Commission] to allow the increased cost of imported coal as a pass-through on a case-to-case basis, to ensure power investments remain viable". Essentially, this was a bailout for power producers, who found that the cost of running their plants had gone up because of a spike in the price of imported coal. The decision would also help such producers to earn a tidy profit - at the cost of the consumers of electricity. By some estimates, Rs 10,500 crore would have to be passed on to end-users of power, raising prices by perhaps 25 paise a unit.
The CCEA, according to Mr Chidambaram, was forced into the decision because "costly power is better than no power". About 78,000 megawatts of capacity that was due to go on stream by mid-2015 will benefit from this decision. The government is right that this was a problem that needed to be addressed; the capacity built up in the power sector should not be allowed to lie idle because the concessionaires would make a loss if they ran their plants. The loss in generation if these projects do not start producing power is too much in a power-starved country. But it is far from certain that this is the right step to take. After all, in essence this allows those who bid for power plants less responsibly, by not taking into account the possible fluctuation in coal price and supply, to evade the consequences of that decision. In other words, it once again makes a mockery of the original bidding process. Consider the possibility that one company bid for a plant with a fixed tariff, whereas another bid with a variable one. If the former won over the latter, it should not now expect a variable tariff.
The decision is all the more puzzling because the government has correctly rejected the demand to "pool" prices of domestic and imported coal, which would have penalised those with fuel-supply agreements for domestic coal, making them pay extra to cover the costs of those dependent on imported coal. The government may have avoided pooling of costs - but is allowing tariffs to go up as a solution any better? For that is, essentially, what the government is proposing the electricity regulator should permit. While more expensive power is better than no power, the companies that bid for the projects should not be permitted a free ride in this manner. Instead of a complete pass-through, they should be forced to bear some of the burden, and given a much lower return on their investment - a less-than-full pass-through. There is also no explanation as to what happens if and when coal gets cheaper. Does the decision cover that reverse eventuality? The government has too often run into trouble for favouring private sector partners at the cost of those the projects are intended to serve. This decision seems to fit in with that mentality, and should be reconsidered.
