Where’s the coal to run power plants?

“Faith consists in believing when it is beyond the power of reason to believe,” Voltaire famously said.

An Indian banker recently mulled over this piece of wisdom when the promoter of a stressed power generation utility sought a “couple of weeks more” to start repaying his loan. “Everything will be alright once Modi-ji is in power,” the creditor said.

It is unclear if Narendra Modi will indeed make it to the hot seat. But if he does, he will have to pull off a Rambo act to help the next government in Delhi clear up the monumental mess the UPA will leave behind, particularly in the energy and infrastructure space.

Take the case of coal. After taking charge in 2004, the UPA dished out over 40 billion tonnes of coal assets to captive miners without a semblance of transparency. The exercise added a mere 15 million tonnes of production in a decade and gifted the UPA with a major scandal to boot.

Back to drawing board To safeguard itself from legal action, the Congress-led government is now in a hurry to de-allocate nearly half of the 64 assets distributed across nearly 200 private companies between 2005 and 2009. Also revoked are a large number of the 70 captive blocks mindlessly allotted to state-owned companies with hardly any assessment of their ability to develop such assets.

This means the next government needs to start from scratch. Considering the long gestation period in developing mining assets, production will therefore be delayed by another decade. Meanwhile, the new Land Acquisition Act will put fresh hurdles in the way of developing coal assets. So, regardless of who comes to power in May, captive coal production may only inch ahead over the next five years.

But that is just one part of the story.

Nearly half of the 130 blocks allotted to either the private or public sector went to fuel power projects. Approximately 11,000 MW of such capacities are now facing an uncertain future, as most of them failed to develop the assets in time.

To add to the problem, the Centre has de-allocated some of these blocks as the allottees delayed developing them.

There is no way these utilities can be catered to by Coal India Ltd. Because, in an equally irresponsible act, the Government forced the national miner to commit supplies to 78,000 MW of power capacities — far in excess of CIL’s production potential.

Since CIL did not have the requisite capacity, it lowered the supply commitment from 90 per cent to 65 per cent of requirement, forcing new utilities to depend on costly imported coal.

Even this would not have created too serious a problem had all the power stations been operating in a regulatory tariff regime. But the UPA thought differently.

It mandated that distribution utilities go for fixed-tariff based bidding to enter into power purchase agreements (PPAs), thereby blocking every avenue to pass on any rise in fuel costs.

Approximately, 48,000 MW of new private sector capacities, including 12,000-14,000 MW based on imported fuel, entered into such agreements to supply power at levelised tariffs for seven to 25 years.

A few such PPAs have been implemented. The rest are on hold because, all too soon, the impossibility of the agreement became apparent.

To bail out the private promoters from the impending crisis, the Central Electricity Regulatory Commission recently prescribed another controversial solution. Two producers working with imported coal have now been offered compensatory tariffs, opening the floodgates for the 19 other projects (mostly domestic coal-based capacities) to seek tariff revision through the backdoor.

Idle capacity While such actions may give power sector investors a short-term breather, it is highly probable that allowing all the projects to charge higher tariffs will spark a slew of legal disputes.

Also, it remains to be seen whether there will be enough buyers for this costlier power.

Unofficial estimates suggest nearly 27,000 MW of new capacities are lying idle with Central, State and private sector utilities, as distribution companies have shown little interest in purchasing electricity at over Rs 3 a unit.

However, this price is too low for new capacities to survive. With nearly 20,000 MW capacity addition expected this fiscal, the problem of low demand for power generated from imported coal is likely to continue. “India will not experience a coal crisis for the next couple of years,” observes the banker quoted earlier.

But there can be no escaping idle assets in power generation – Modi or no Modi.

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