In a major relief to private power producers, the Cabinet Committee on Economic Affairs (CCEA) on Friday gave its go-ahead for a mechanism that would allow the electricity generators to pass through to distribution utilities the cost of expensive imported coal used by them.

“The higher cost of imported coal has to be considered for a pass-through,” said Finance Minister P. Chidambaram.

Fuel supply pact

Explaining the mechanism, Chidambaram said that Coal India will sign fuel supply agreement for 78,000 megawatt (MW) capacities.

This would also include cases of tapering linkage (whose captive mine has not started production) that are likely to be commissioned by March 30, 2015. Actual supply, will however, commence when the power purchase agreement (PPA) with distribution utilities (discom) is in place.

Taking into account of the overall domestic availability and actual requirement, the FSAs that will sign will offer 65 per cent domestic coal for 2013-14 and 2014-15; 67 per cent for 2015-16 and 75 per cent for 2016-17 to the annual contracted quantity (ACQ).

To meet the balance FSA obligation (15 per cent), Coal India may import coal and supply the same to willing power producers on a cost-plus basis. The power producer can also import coal himself. He does not have to go through Coal India, Chidambaram said.

Coal distribution policy

For implementation of the mechanism, the Coal Ministry will issue suitable orders supplementing the new coal distribution policy.

The Power Ministry will issue an appropriate advisory to the Central Electricity Regulatory Commission (CERC) and state regulators, including modifications in the bidding guidelines, to enable the appropriate commissions to decide the pass-through the higher cost of imported coal on a case-to-case basis.

In addition, there are another 4,660 MW of capacities, which do not have a coal linkage but are likely to be commissioned by March 2015.

“Therefore, it has been decided any of these power projects, if they are commissioned by March 31, 2015, subject to availability of coal, a mechanism will be worked out to supply coal to them,” he added.

Higher tariff

Implementation of pass-through mechanism would lead to increase in electricity tariff. The exact rise in tariff would differ from one power plant to another based on the quantity of imported coal utilised.

The Finance Minister said that the choice is paying a little more for electricity or having no electricity at all. “Vey large capacities are stranded because of no coal or gas. It serves no purpose.”

According to the Government, this is an interim arrangement for breaking the coal scarcity in the 12th Five-Year Plan period. The ultimate goal is to increase the domestic production of coal.


The decision would rescue the power plants that are facing severe coal crunch. “GMR, JSPL, CESC and Adani to benefit significantly,” said Macquarie Equities Research in its recent report.

“We believe the fuel pass-through structure has higher chances of getting implemented compared to coal price-pooling, as fuel pass-through will be on a case-by-case basis (renegotiation of PPAs of SEBs) as against broad-based increases in fuel cost under coal price pooling,” Inderjeetsingh Bhatia and Amit Sinha of Macquarie said in their report.

However, the proposal is likely to be opposed by a few states as the average cost of power purchase will increase.

(This article was published on June 21, 2013)
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