Coal price pass through: Boon for power firms, bane for consumers

Power companies got a new lease of life last week after the Government offered clarity on domestic coal supply and also allowed them to pass on the cost of expensive imported fuel.

This brings certainty to the sector that is hit by fuel scarcity, lack of funding, regulatory hiccups and financially weak distribution network.

The WINNERS

The key beneficiaries are mainly private power developers such as Adani Power, Essar Power, Lanco, GMR, KSK, Sterlite Energy, Adhunik Power, SKS ISpat Power and Jindal Power, among others.

With last week’s decision, the Government has assured that these companies would get at least 65 per cent of coal supplies from domestic mines in 2013-14. This would go up to 75 per cent in 2016-17. This means the power plants would be operating at about 65-75 per cent plant load factor even without imported coal.

This saves them from falling into the non-performing asset (NPA) category and would generate revenues not only to service debt but also boost the parent company’s balance sheet.

Banks and financial institutions with substantial exposure to the power sector will also be heaving a sigh of relief. Each megawatt has a capital cost of Rs 5-6 crore. And the decision is going to impact around 78,000 MW.

This is also a blessing in disguise is for 15,190 MW power plants being set up by DVC, Sterlite, Adhunik, GSECL, KSK, GMR, Adani, DB Power, and SKS Ispat.

These power stations were allocated captive coal mines, but have failed to bring the mines into production. Now, the Government has decided to offer them coal supply till the time the captive mines commence production. The Government also proposes to come to the rescue of units of Jindal Power (1320 MW); GMR Energy (1320 MW); Adani Power (2640 MW) and KSK (1200 MW) that would be commissioned by March 2015 but have no fuel supply.

The monopoly public sector miner Coal India Ltd always maintained that it would supply 65 per cent of the annual contracted quantity and that the imports to meet the shortfall will not have an adverse financial impact on its balance sheet.

It is to be seen what efforts are being made by Coal India to increase domestic production. The Government defended its decision saying cost-pass through is an ‘interim’ arrangement and in the long run indigenously produced coal would be supplied to fire electricity generating stations.

CONSUMERS hit

But the most important section in the electricity chain, the consumers, will be hit by this decision as their electricity bills will see a sharp increase.

The electricity distribution utilities are in bad financial health. They are unable to buy additional power to bridge the gap between demand and supply resulting in long power cuts in many States.

But even if one pays more, there is no guarantee of uninterrupted power supply.

The Government is trying to revive discoms through various schemes such as financial restructuring programme and Restructured Accelerated Power Development and Reforms Programme (R-APDR).

However, it would take at least three more years for most of the discoms in the country to become financially strong.

Higher electricity rates also impact the fuel and power index (weight of 14.91 per cent) in over all inflation.

In May, the index for this group declined by 1.3 per cent to 192.0 from 194.6. But electricity price was up by 13 per cent.

siddhartha.s@thehindu.co.in

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