In the process of fulfilling part of Centre's commitment made at COP21, Paris climate summit, to reduce its carbon footprint by promoting alternate means of power while lessen thermal energy dependence, Union Finance Minister Arun Jaitley's decision to double the cess on coal may increase the stress on the already debt-ridden distribution companies besides negatively impacting the thermal power sector which presently caters to more than 80% of India's energy needs.
The minister's decision in the budget to modify the Clean Environmental Cess on coal into Clean Energy Cess and increase it from Rs 200 to Rs 400 will not only pull up the cost per unit of power generation between 10-15 paise but may stress the already ailing distribution companies (discoms) further.
Power producing companies and market analysts alike have opined that the cost of power will definitely surge.
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"If (the increase in costs) passed on to consumers, this would mean an increase in end consumer tariffs upto 20 paise per unit. If not passed to consumers, discoms would end up making losses, as generating companies will get it recovered through change in law under power purchase agreements," Debasish Mishra, partner in Deloitte Touche Tohmatsu India said.
Under the present structure, generators have agreements with the discoms which can be changed by amending laws.
The discoms, termed by the government as the weakest aspect of the power sector, already have accumulated losses of approximately Rs 3.8 lakh crore and outstanding debt of Rs 4.30 lakh crore with interest rates upto14-15%, making the government come up with the UDAY scheme to rescue these distributors from their plight.
Officials in the industry said in case the states decide not to increase the power tariff despite the rise in coal prices, the axe will fall on the discoms whose operational losses are being funded by debt.
Mishra said the government should have waited for the benefits of the Uday scheme to roll out before increasing this cess.
"This (increase in cess) will also put more stress on tariffs and regulators, as in most of the state's cost of Average Billing is lower than Average Cost of Service," Anil Sardana, chief executive officer & managing director of Tata Power said.
As per Sardana, the commercial and industrial tariffs in some states are at par with wind and solar power generation.
An official in NTPC also indicated a rise in power costs by a minimum of 10 paise per unit as a direct impact of the rise in cess.
While Jaitley intended to collect more indirect taxes by raising the cess, the minister strategically made way so that Coal India doesn't feel any heat either in its offtake or on the bourses.
"This cess will be charged at the consumers' end and thus will not be affecting our coal offtake," a Coal India official said.
Further, according to industry officials, as the cess will be applicable on domestic as well as imported coal, consumers will have no other option but to pay the hiked price.
Manish Aggarwal, head of the energy and natural resources vertical at KPMG India said Jaitley's decision on this front has gone against its own directive.
"This goes against the intuitively stated intent to reduce cost of power to industry," he said.
Although Jaitley has said the government to have been drawing up a comprehensive 15-20 year plan to augment nuclear power generation at a budgetary allocation upto Rs 3,000 crore per annum, coal secretary Anil Swarup had indicated India's heavy dependence on thermal power to continue atleast in the coming five yeaRs
"Solar and alternate energy will not be able to entirely fulfill the country's demand for power," he said on a previous occasion.
The government has laid down an ambitious target to quadruple its renewable power capacity to 175 gigawatts (Gw) by 2022 while the total capacity under this segment stood at just about 34 Gw during early-2015.